CHAPTER- IV

INVENTORY MANAGEMENT AT NTPC

Inventory management covers important issues to maintain optimum level of inventory by applying various inventory control techniques or combination of techniques depending on the nature of the item with respect to its value, criticality, market availaity and other consumption patterns.

OBJECTIVES:
Classification of items for management reporting and fixation of the norms.

Elaborate inventory control techniques and procedural guidelines for their application.

Materials planning and indenting, using the tools of the above stated techniques of combination of techniques.

Fixation of responsibility for undertaking various inventory analyses . Review and monitoring inventory status with respect to norms and levels for various items or category of items.

ORGANIZATIONAL STRUCTURE
The organization structure for site material department is shown here:

HOMM- Head Of Material Management:

HOMM
Purchase Wing
Goods Receipt Section

Stores Wing

Policy planning & Monitoring Cell

Mat. Planning & Inv. Ctrl Section

Custody Section

Clearance & Dispatch Grp

Custody1

Inspection &
Risk/Insurance Inward Grp Mgt Group

Custody2

Custody3

CLASSIFICATION OF STORES AND SPARES:

For easy inventory analysis as well as for reporting to management in a handy and convenient form, NTPC has codified the stores and spares under 100 main groups. These 100 main groups are further grouped as:

CONSTRUCTION STORES:
o Cement o Steel o Other (viz. pipe, pipe fittings, cables etc)

O & M STORES
o Coal o Fuel o Spares (excluding insur4ance spares) o Loose tools o Chemicals, gases and explosives o Oils and lubricants o Stores other than spares (consumables and gen. stores) o Scrap

INVENTORY NORMS:
Inventory norms is defined as the permissible upper limit of inventory holding including quantities for which payments have been made in part or in full in advance of receipt and acceptance.

1. GUIDING FACTORS FOR FIXATION OF INVENTORY NORMS:

The factors which influence optimum inventory levels are the uncertainties involved in forecasting processing time for procurement, manufacturing and transportation variability associated with the future consumption patter, the future market availability and the service level promised to be provided to the end user. Based on these factors, NTPC has adopted the following norms:

Construction stores:
o Cement o Steel o Other 2 3 months usage. 9 months usage 9 months usage

O & M Stores
o Coal o Spares o Loose tools o Chemicals, gases & explosives o Oils and lubricants o Stores other than spares o Scrap - 15 days usage - 18 months to 24 months - 6 months usage - 3 months usage - 3 months usage - 6 months usage - 6 months

2. MONITORING OF INVENTORY NORMS:

On the basis of inputs received from site materials management which shows the inventory status for 11 categories of items. The same is sent to HOMMs respective sites, who intern analyze it and work out inventory turn over ratio and compare the same with respect to set norms in coordination with policy, planning and monitoring cell. Whenever any deviation found, on inventory holding of particular group (s) of stores and spares with respect to norms, reason for the deviation is established and recorded in a proper format. Further corrective actions proposed

is taken for bringing down the inventory holding to the norms and co-ordination required from CMM and higher officials.

CONSUMPTION (A,B,C) ANALYSIS:

The various limits for analyzing the inventory as per ABC classification shall be as under However, the under mentioned limits shall be subjected to periodical review:

A class: More than Rs 1lakh B class: More than Rs. 10,000 up to 1lakh C class: Up to Rs. 10,000/For identifying an item as A,B or C, the annual value value of consumption in the

preceding financial year shall be the basis to start with. Subsequently i.e. after system capability reaches an adequately level, computer shall identify an item as A, B, or C based on moving average concept to take care of the situation more realistically.

STOCK HOLDING (X, Y, Z) ANALYSIS:

For ensuring continuous weeding out of unwanted inventory stock holding analysis i.e. XYZ analysis will be of significant important. The criteria for declaring an item as X, Y, or Z shall be the same as for ABS items on stock value consideration basis. The analysis shall be based n stocks held at the end of every quarter for X class items, at the end of half year for Y class items and at the end of financial year for Z class items.

ANALYSIS BY CRITICALLY FOR OPERATION (VED):

Vital (V): Non availability when needed involves close down of the units/resulting in very high stocks outs. Essential (E): Non availability involves high stock out costs. Desirable (D): Non availability does not involve any significant stock out costs. Analysis by velocity of usage

LEAD TIME ANALYSIS:

Lead time: is the estimated time lag between the date, the indent is accepted and registered in purchase wing and the date of physical receipt of material in the Receipt section of the first consignment approximating in quantum to the EOQ. Lead time is sub-divided into the following components: Administrative lead time: Administrative lead time is an area where stringent control be exercised by each SMM by fixing norms for different modes of tendering and circulating the same to all the indenting department for realistic planning in raising the material indents. The norms cannot be the same for all the projects by virtue for their work culture, geographical locations, location of the market etc. Suppliers lead time: This is an area which normally falls in the domain of supplier. It is therefore, very essential that each SMM takes cognizance of this fact ad ascertains/valuates the time that is to be provided for manufacturers of stock lists to supply different types of materials also taking into consideration that some of the materials may be available off the shelf. It is therefore, essential to build a data bank of actual lead times encountered. This needs to be updated at least once in a year, before notifying the same to all concerned. Transportation lead time: It is very essential to build data on the normal transportation time for different modes of transport for different important places from where the consignments are expected to be dispatched. This will also assist SMMS to take decisions for getting the material with a lesser transportation lead time to meet the urgencies of plant operation. Provision has been made in the Transport Manual for service level expected from the empanelled transporters.

LEAD TIME ANALYSIS:

The estimated lead time greatly influence provisioning of material particularly more so when there is an abrupt change in market conditions. Hence, monitoring of actual lead time for individual items/groups of items against the estimate is very essential for alignment the planning conditionally in line with latest trends to attain desirable service levels without increasing the level of inventory holding.

Responsibility:
It shall be the responsibility of each Purchase Executive to collect latest data in respect of the actual of three lead times identified above, maintain and assess, and forecast the estimated future lead times after consulting the related vendors if need be, for various materials item wise/trade/group wise as the case may be being procured by him and maintain the same. Issue of lead time notification to the authorized inventors shall be the responsibility of the Head of Material. There shall be a further review of the lead time periodically to optimize the lead time.

RATIO ANALYSIS & INTERPRETATIONS

RATIO ANALYSIS
The investment on raw material over a period of 5 year form 2003-04 to 2009 -10 is presented in the following table.

1. INVESTMENT ON RAW MATERIALS:

Year 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Raw material (in lakhs) 13386.80 11690.67 49950.88 42950.66 46087.45 93605.78

100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 Raw material (in lacks)
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

INTERPRETATION:
Form the above table it can be understood that the inventory of NPC was recorded at 13,386.80 during the year 2004-05 and it is increased to 93605.78 during the year 2009-10. It shows that there is an increase in the inventory to the more extent of 80218.98. The average inventory of NTPC was recorded at Rs.42945.41.The highest investment in inventory was recorded in the year 2009-10

2. TREND ANALYSIS:
Trend analysis technique is applied to know the growth rate in investment of raw material of NTPC over the review period which is shown in the following table.

Year 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Raw material (in lakhs) 13386.80 11690.67 49950.88 42950.66 46087.45 93605.78

Trend (%) 100% 87% 373% 315% 344% 699%

100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0
Raw materialsar

INTERPRETATION:
The investment in inventories has increased in the year 2009-10. And the last year investment has declined continuously. The percentage in 2007-08 was 315% as compared to years 2007-08 to 2009-10. The trends in inventories show that inventory have been more in the year 2009-10 and then it has shown a downward trend and again it increased to some extent. The investment in inventories has shown fluctuating trend in initial years and then it raised to 699 %and again showing fluctuating trend.

3. INVENTORY TURNOVER RATIO:

This ratio indicates the number of times the stock has been turned over during the period & evaluated the efficiency with which a firm is able to manage its inventory. This ration is calculated by applying the following formula.

Cost of goods sold Inventory turnover ratio = Average inventory

Cost of goods sold 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 60150.35 59021.41 121551.71 127533.58 130392.68 211636.92

Avg.inventory 7402.31 37975.30 95065.28 12390.06 13338.01 160035.93

Ratio 8.13 1.55 12.79 10.29 9.78 1.32

250000 200000 150000 Cost of goods sold 100000 50000 0 Avg.inventory Ratio

INTERPRETATION:
From the above table 2004 it can be observed that inventory turnover ratio is 8.13 during 200405 and its gradually decreased to 1.55 during 2005-06. As compared to all the years the ratio is very less in 2009-10. The average inventory turnover ratio was recorded at 7.3 times during the review period.

4. INVENTORY CONVERSION PERIOD:

It may also be of interest to see average time taken for clearing the stocks. This can be possible by calculating inventory conversion period. This period is calculated by dividing the numbers of the days by inventory turnover. This formula may be as:

Days in a year Inventory conversion period = Inventory turnover ratio

Year 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-10

Cost of goods sold 60150.35 59021.41 121551.71 127533.58 130392.68 211636.92

Avg. inventory 7402.31 37975.30 95065.28 12390.06 13338.01 160035.93

Ratio 8.13 1.55 12.79 10.29 9.78 1.32

ICP(days) 44 232 28 34 36 272

300 250 200

Ratio

150
ICP(Days)

100
50 0 2003-04 2004-05 2006-07 2007-08 2008-09 2009-10

INTERPRETATION:
From the above table 2004 it can be observed that (1) Inventory conversion period was 232 days during 2005-06 but it decreased to 204 during 2005-06, which indicates that the stock has been very quickly converted into production which means the company is managing the Interpretation. From the above table 2004 it can be observed that inventory turnover ratio is 8.13 during 2004-05 and its gradually decreased to 1.55 during 2005-06 efficiently. 2) The lowest inventory conversion period was recorded at 28 days in the year 2006-2007 the highest inventory conversion were recorded at 272 days in the year 2009-10. The average

inventory conversion period was recorded at 107 days during the review period.

5. PERCENTAGE OF INVENTORY TURNOVER CURRENT ASSETS:

In order to know the percentage of inventory over current assets the ratio of inventory to current assets is calculated and which is presented in the following table. Inventory Inventory turnover current assets ratio= Current ratio Year 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Inventory 13386.80 11690.67 49950.88 42950.66 46087.45 93605.78 Current assets 24172.33 28770.78 53063.75 45598.02 46713.32 86811.49 Ratio (%) 55% 40% 94% 92% 92% 107% * 100

100000 90000 80000 70000 60000 Inventory 50000 40000 30000 20000 10000 0 2004-20052005-20062006-20072007-20082008-20092009-2010 Current assets Ratio (%)

INTERPRETATION:
From the above table it can be understand that the 55% of inventory over current assets ratio was showing trend for two years 2004-05.However from the year 2009-10 it is showing an increasing trend. The average inventory over current assets ratio was recorded at 80%.

6. PERCENT OF INVENTORY OVER TOTAL CURRENT ASSETS & FIXED ASSETS:

Inventory / current + fixed assets Year 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-10 Inventory 13386.80 11690.67 49950.88 42950.66 46087.45 93605.78 Current assets 87167.64 87468.76 117985.89 112647.26 112637.07 197330.5 Ratio 15.35% 13.36% 42.33% 37.50% 40.91% 47.43%

250000

200000

150000 Inventory Current assets 100000 Ratio

50000

0 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-10

INTERPRETATION:
During the year 2005-06 the ratio was 15.35% on its declined to 13.36% in the year 2005-06. From the year 2006-07 it is showing fluctuating trend but as compared to above 2 years it is increasing. The lowest Inventory over total assets ratio was recorded at 13.36% during the year 2005-06 and the highest Inventory ratio was recorded at 43.43% during the year 2009-10.The average Inventory to total assets ratio was recorded at 32.81% during the review period.

7. PERCENT OF INVENTORY OVER TOTAL CURRENT LIABILITIES:

In order to know the percentage of Inventory over current liabilities the ratio of Inventory to current liabilities is calculated and which is presented in the following table.

Percent of Inventory over total current liabilities ratio = Inventory * 100 Current liabilities

Year 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-10

Inventory 13386.80 11690.67 49950.88 42950.66 46087.45 93605.78

Current liabilities 7862.11 8042.62 16204.14 14876.45 17728.22 36253.41

Ratio 17% 145% 308% 284% 259% 258%

100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 1 2 3 4 5 6 7 Year Inventory Current liabilities Ratio

INTERPRETATION:
From the above table it can be understand that the 17% of Inventory over current liabilities ration was showing a declining trend for two years 2004-2005. During the year 2005-2006 the ratio was it gradually increased to 145 and there is a net increase to the extent of 128. The lowest Inventory over total amounts ratio was recorded at 14 during the year 2004-2005. The highest Inventory to current liabilities ratio was recorded at 308 during the year 2006-07. The average Inventory to current liabilities ration was recorded at 211 during the review period.

8. CURRENT RATIO:
In order to know the current ratio the percentage of current assets to current liabilities is calculated and which is presented in the following table. Current assets Current ratio = Current liabilities Year 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Current assets 24172.33 28770.78 53063.75 45598.02 49713.32 86811.49 Current liabilities 7862.11 8042.62 16204.14 14876.45 17728.22 36253.41 Ratio 3.07% 3.57% 3.27% 3.06% 2.80% 2.39%

100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 Current assets Current liabilities Ratio

INTERPRETATION:
From the above table it can be interpreted that the 3.07% of current assets over current liabilities ratio i.e., current ratio was showing a decreasing trend from year 2005-06. In the year 2004-05 the ratio was 3.07 and has increased to 3.057 in the 2005-06. The lowest current ratio was recorded at 2009-10 which is 2.39% and the highest ratio was recorded at 3.57 during the year 2005-06. The average current ratio was recorded at 3.02 during the review period.

9. QUICK RATIO:
The quick ratio is the relationship between quick to current liabilities quick assets is more rigorous test of liability position of a firm it is computed by applying the following formula. Quick ratio= current assets-current liability Where quick assets = current assets- inventory

Year 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Quick assets 10785 17080 3112 3347 3625 3207

Current liabilities 7862.11 8042.62 16204.14 14876.45 17728.22 36253.41

Ratio 1.37% 2.12% 0.02% 0.22% 0.20% 0.08%

40000

35000

30000

25000 Quick assets 20000 Current liabilities Ratio 15000

10000

5000

0 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

INTERPRETATION:
From the above table it can be understand as that the % of quick assets to current liabilities i.e., the quick ratio was 0.002 in 2006-07 and from that year it is showing increasing trend. The highest quick ratio was 2.12 during the year 2005-06. The average quick ratio was 0.66 during the review period.

CHAPTER V FINDINGS SUGGESTION CONCLUSION

FINDINGS
There is an increasing trend in investment in inventory.

The average inventory ratio was very less during the period i.e. it has recorded 1.32 in 2009-2010.

The inventory conversion period is gradually decreasing year by year because the funds are unnecessarily tied up.

The average inventory ratio over current asset ratio is showing an increasing trend which recorded at 80%.

The current ratio is showing decreasing trend during the review period.

The investment in inventory has shown the fluctuating trend during the review period.

The inventory turnover ratio is reducing the profit and the liquidity position of the industry, so proper measures are to be taken to retain the position of the industry.

SUGGESTIONS
Though the production is higher in the year 2005-06 as per inventory conversion period it took 272 days. This shows that there is demand for inventory and the funds unnecessarily tied up. So, proper demand forecasting should be done and according to that it may be manufactured. The investment on raw material should be made as per the requirement. Unnecessary investment may block up the funds. Neither too high nor too may inventory turnover ratios reduce profit and liquidity position of the industry. So, proper balance should be made to increase profits and to ensure liquidity. The raw material should be acquired from the right source at right quality and at right cost The process that was being used by NTPC with the purchasing department should undergo changes, so that, it seeks enhance the celerity of the delivery of a product without compromising its quality by improving the utilization of material, labour and equipment. To reduce the work, the purchasing department may enter the purchasing order into a database and did not send a copy to anyone. This generally simplifies the process for all concerned. As a result it would able to reduce the work of its accounts payable department.

CONCLUSIONS

Over all the inventory of NTPC is up to the mark. The production of power during 2004-05 was 7,47,436 and 7,77,092 respectively which is higher as compared to 2007-08 which is 6,87,373 and 7,27,447 respectively. Investments on raw material are 93605.78 lakhs which very high as compared to 2007-08 which is only 460870.45 lakhs. The inventory turnover ratio shows that the stock has been converted into sales is only 1.32 times. In the year 2005-06 the stock was cleared within 28 days where as it took 232 days in the year 2004-05 which took more days for clearing stock In this type of process, it requires more number of employees and supplier should also wait for until the accounts are matched. This process takes an input, adds value to it and provides an output to an internal or external customer.

BIBLIOGRAPHY

LITERATURES:
I.M.PANDEY PRASANNA CHANDRA S.P. JAIN&K.L.NARANG : : : FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT FINANCIAL ACCOUNTING & ANALYSIS

WEBSITES:
WWW.NTPC. CO.IN WWW.NTPCINDIA.COM WWW.GOOGLE .COM