INVENTORY CONTROL

MANAGEMENT & SPARE PART

INVENTORY CONTROL FOR
RAILWAYS
INDUSTRIAL MANAGEMENT
DEPARTMENT OF MANUFACTURING PROCESSES AND AUTOMATION
ENGINEERING
NETAJI SUBHAS INSTITUTE OF TECHNOLOGY (NSIT)
UNIVERSITY OF DELHI
23rd April, 2015

BY
661/MP/13 SHUBHAM GUPTA
662/MP/13 SHUBHAM KUCHHAL
663/MP/13 SHUBHAM SHARMA
664/MP/13 SUBHASH
665/MP/13 TANVI RAI
666/MP/13 VAIBHAV CHOUDHRY
668/MP/13 VANSH MENDIRETTA
669/MP/13 VARUN KUMAR
670/MP/13 VERNICA AHUJA

CONTENTS
SECTION - I

INTRODUCTION

REASONS BEHIND INVENTORY CONTROL

6
INVENTORY CONTROL MODELS
8
MANUFACTURING MODEL
8
PURCHASE MODEL
9
ECONOMIC ORDER QUANTITY (EOQ)
10
TECHNIQUES OF INVENTORY CONTROL
12
JUST IN TIME (JIT)

13

LEAD TIME (LT)

14

SPARE PARTS INVENORY MANAGEMENT

15

SECTION - II

SPARE PARTS INVENTORY CONTROL OF INDIAN RAILWAYS

17
INVENTORY TECHNIQUE

17

STORE MANAGEMENT

18

PROVISION FOR BUFFER STOCK

19
OVER STOCKS
20
SURPLUS STORES OF INDIAN RAILWAYS
20
MOVABLE SURPLUS
21
DEAD SURPLUS

21

SCRAP AND SCRAP DISPOSAL

22
DISPOSAL OF SURPLUS STOCKS
22
INVENTORY CONTROL
23
OUT OF STOCK POSITION
23
STORES ACCOUNTING
24
STOCK TAKING

24
3

STOCK VERIFICATION
24
COMPUTERIZATION
25
CONCLUSION
26

SECTION - I

INTRODUCTION
Inventory Control is the supervision of supply, storage and
accessibility of items in order to ensure
an adequate supply without excessive oversupply. Stock control is
defined as "the activity of checking
a shops stock".
It can also be referred as internal control - an accounting
procedure or system designed to promote
efficiency or assure the implementation of a policy or safeguard
assets or avoid fraud and error etc.
Inventory control may refer to:
In economics, the inventory control problem, which aims to
reduce overhead cost without hurting sales
In the field of loss prevention, systems designed to introduce
5

technical barriers to shoplifting

It answers the 3 basic questions of any supply chain:
1. When?
2. Where?
3. How much?

Reasons for Inventory Control:

1.Maximizing Space
As a small business owner, you probably have limited storage
space in your business location. According to SCORE, inventory
control allows you to maximize your space by identifying the
faster and slower sellers in your product mix. As a result, you can
provide for space for better sellers while weeding out slowmoving items.

2. Room For new merchandise

In a competitive business environment, being the first to carry the
newest products on the market gives you an edge over your
competitors. By effectively managing and controlling your
inventory, you're continuously eliminating the outdated and
obsolete products in your mix, which means you;ll always have
6

room for the newest, latest thing. Customers will look to your
business first when searching for new
items.
3.proper inventory control ensures increased speed in turning
over your stock. This reduces the costs associated with carrying
excess inventory and keeps merchandise moving through your
operation instead
of collecting dust in your stockroom. As a result, you will run a
leaner, more efficient operation, which can lead to higher profits.

4. Lower Production Costs

Production costs are lower when products are produced on a mass
scale, so most companies try to buy and
produce in bulk. However, if they produce too much, the costs of
production and storage could outweigh
the potential savings of bulk-production. An inventory control
system lets the company know how many
products it should order or produce when restocking its inventory.
5. Prevent Theft
A strong inventory control, in which every item is cataloged and
given a bar code for scanning during
transactions, will allow owners to track any unaccounted-for items
that could be the result of theft.
By looking for patterns, a company can then create a better plan
to prevent theft by employees or
customers.
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6. Perishable Reasons
When dealing with perishable products, it is important for
businesses to maintain the correct amount of
inventory. If they keep too few items in their inventory they are
forfeiting profits because customers
will not be able to purchase the items they want and go to a
different store. However, if they produce
too many items, they will have to discard them after they perish
and lose the money it cost to produce
the inventory.

MODELS OF INVENTORY CONTROL:

1.MANUFACTURING MODEL
2.PURCHASE MODEL

MANUFACTURING MODEL
The manufacturing model can be divided into:
1. Manufacturing model with no shortages.
2. Manufacturing model with shortages.
Manufacturing model with no shortages.
In this model the following assumptions are made:
1.
2.
3.
4.

Demand is at a constant rate.

All cost coefficients are constants.
There is no shortage cost.
The replacement rate is finite and greater then the demand
rate. This is also called replenishment rate or manufacturing
rate.
8

Schematically this model is illustrated as follows:

Here,
r : annual demand in units.
k: production rate of the
items.
t : time when we consume and build up.(

t1

t2

Manufacturing model with shortages.

The assumptions made in this model are the same as the above
model.
There are four components of inventory cost:
1. Item cost 2. Setup or order cost 3. Items holding cost
4.shortage
Schematically it can be represented as follows:

PURCHASE MODEL
The model which describes the theoretical customer journey from the
moment of first contact with the brand to the ultimate goal of purchase. This
can help with the following:
Planning marketing campaigns.
Highlighting areas in order to improve conversion rate.
Evolving the sales process.
Designing customer relationship management (CRM) system.

ABC Analysis (Selective Inventory Control )

ABC analysis helps segregating the items from one another and tells how
much valued the items is and controlling it to what extent is the interest of
the organization.
ABC divides an inventory into three categories :

A items: Very tight control and accurate records.

B items : With less tightly controlled and good records.

C items

: With the simplest controls possible & minimum records.

Procedural Steps
1.
2.
3.
4.
5.

Identify all the items used in an industry.

List all the items as per their value.
Count the number of high valued, medium valued and low valued items.
Find the percentage of high, medium & low valued items.
A graph can be plotted between percent of items (on X-axis) and percent of total
inventory cost(on Y-axis) as shown in fig.

10

Economic order quantity:

Economic order quantity (EOQ) is the order quantity that minimizes total inventory holding costs and
ordering costs. It is one of the oldest classical production scheduling models. The framework used to
determine this order quantity is also known as Wilson EOQ Model or Wilson Formula. The model
was developed by Ford W. Harris in 1913,[1]but R. H. Wilson, a consultant who applied it extensively,
is given credit for his in-depth analysis.
EOQ applies only when demand for a product is constant over the year and each new order is
delivered in full when inventory reaches zero. There is a fixed cost for each order placed, regardless
of the number of units ordered. There is also a cost for each unit held in storage, commonly known
as holding cost, sometimes expressed as a percentage of the purchase cost of the item.
We want to determine the optimal number of units to order so that we minimize the total cost
associated with the purchase, delivery and storage of the product.
The required parameters to the solution are the total demand for the year, the purchase cost for each
item, the fixed cost to place the order and the storage cost for each item per year. Note that the
number of times an order is placed will also affect the total cost, though this number can be
determined from the other parameters.

11

The typical ordering quantity versus cost graph is given below:

x-axis = order quantity ; y-axis = cost
14
12
10
8

inventory carrying cost

total cost
optimum quantity

ordering cost
4
2
0
0

10

12

14

The optimum quantity line shown in the graph is the quantity of order for which the total inventory cost comes
out to be minimum, therefore that is the ECONOMIC ORDER QUANTITY (EOQ).

Techniques of inventory control:

To understand the various inventory management techniques it is crucial to
know why it is important.
First, a mismanaged inventory can lead to an unnecessary increase in
the working capital. The excess funds could have been fruitfully
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directed to fuel the companys growth initiatives or research and

development efforts.
Second, effective inventory management would lead to low storage
costs, which will in turn lead to an increase in the companys profits.
Storage space is expensive; if you are able to manage your inventory
well and able to reduce the amount of goods that you need to store,
then you will require less space, which will in turn lead to low
warehouse rental costs.
Third, it can help you satisfy your customers by providing them with
the products they need in the swiftest manner. Poor inventory
management leads to lower availability of goods and higher delivery
time. Hence, if you want to gain those service satisfaction stars, you
need to manage your inventory well.
Fourth, goods stored in inventory over a long period may spoil. This
leads to unnecessary overheads in operating a business. Hence, proper
inventory management can help you reduce those costs greatly.
Fifth, if you have inventories scattered in various locations, you need a
proper system to manage those inventories on the basis of demand and
supply. Inventory management techniques can help you go a long way
in managing multiple inventories.
Various businesses have employed the basic inventory management
techniques or inventory control methods to keep their inventory costs in
check. Inventory management has become an intrinsic part of supply chain
management. There are various methods that an organization may use to
manage its inventory.

Just in Time (JIT)

As the name suggests, the JIT inventory management technique says that the
item will be ordered only if it is needed for shipping or manufacturing. The
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item may be ordered a few days back depending on the delivery time
promised by the supplier. A mandatory requirement of this approach is the
proper identification of each item before the manufacturer or reseller
requires it. Since, there can be many goods required by supplier or
manufacturer at any time, each and every future requirement should be
properly identified and timely ordered.
Another crucial requirement for this technique is the timely delivery of the
order by the supplier. Since the item is ordered just before it is needed, any
delay in the arrival of the item may delay the whole production process; this
may be treated as a drawback in the approach. The JIT inventory
management technique helps reduce the size of the inventory and leads to
low storage costs. Although, early identification and order of all items
required in the future should always be there to make this approach effective.
Early identification of risks is also a prime concern in managing a business
properly. Ideally, JIT is the best inventory technique with almost
zero blocked capital.

JIT is quite a virtual impossibility, therefore we need different

techniques for inventory control. Effective inventory
management requires understanding
and knowledge of the nature of inventories and, to gain this
understanding, some analysis and classification of inventory
are required. They are:

1. A.B.C. Analysis
2. H.M.L. Analysis
3. X.Y.Z. Analysis
4. V.E.D. Analysis
5. F.S.N. Analysis
6. S.D.E. Analysis
7. G.O.L.F. Analysis
8. S.O.S. Analysis.

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LEAD TIME(LT)
It is the span of time required to perform an activity. In
our logistics context, it is the time between recognition of
a need for a product or service and its receipt. Individual
elements of lead time include - order preparation time,
order transmittal time, queue time, manufacturing time,
transportation time, receiving and inspection time. In
other words, purchasing, manufacturing, transportation,
15

receiving, and inspection are individual lead time

activities.

SPARE PARTS INVENTORY

MANAGEMENT:
1. INSURANCE INVESTING/SPARES:
An essential spare in less quantity (just sufficient) is
kept as insurance, just in case the production line
fails. For example, in a power station having 5
generators, the shaft is quite a costly item while is
relatively vulnerable to be damaged as compared to
other parts, though gets damaged quite less. Now
one shaft is kept as insurance, if any shaft fails, it is
replaced while a new one is ordered which takes its
own time to manufacture.
2. RUNNING SPARES:
The spares are utility spares which will be needed in
order to finish a certain task/target by the
organization or person in a certain long duration of
continuous work. Example for a long drive, people
tend to stock petrol, spark plugs, engine oils, etc.
3. PROPRIETARY PARTS:
Any item manufactured by the Original Equipment
Manufacturer (OEM) , purchased by the company, if
encounters any fault, the spare part becomes very
critical. Now the spares might not be available for a
long period of time, or the OEM might charge extra,
or the spare part produced by a third party
manufacturer may not be suitable for the product or
the OEM and services are denied. In order to take
care of that, the user issues a Proprietary Article
16

Certificate (PAC), which allows the user to buy spares

from the OEM or any other manufacturer approved
by the OEM.

SECTION - II

17

Spare parts Inventory

Control of Indian Railways
The Indian Railways is one of the biggest institutions in the world. It has the
2nd largest employee base in the world after Wal-Mart. It caters to the needs of
nearly 8 to 9 million people per day, the largest passenger base in the world. A
very effective and sound management system is required to run this
humongous project.

INVENTORY TECHNIQUE:
Railways need to have a good spare parts inventory technique for both
running and maintenance therefore choice of proper spare part inventory
technique is crucial.
(i). The railways must have INSURANCE SPARES for its power generation
facility for lines and sheds. All the generators must be well equipped and
functioning while stand by generators and parts must be kept. Also an active
availability of railway line spares must be available at each station so as to
facilitate proper maintenance of the line as it becomes extremely critical as
human lives depend upon it or the least if line is left damaged for a longer
time, the railway transient system comes to a halt over that line that causes a
lot of trouble.
(ii). RUNNING SPARES which are required for smooth functioning of the
locomotive should be installed in each locomotive running on tracks, since
18

many long stretches of railway lines exist, it becomes extremely critical for a
locomotive to work smoothly throughout. All sorts of essential spares like
spare fuel, lube oil, fuses, toolbox and maintenance kits must be installed on
the loco.
For such an application, where such time tight needs exist a proper inventory
management system needs to exist. Proper storage of all spares is essential
followed by their maintenance, verification, checking, disposal and new
orders. Proper care is a pre requisite for most of the spares and timely
inspection is crucial.

STORE MANAGEMENT:
The Indian Railways uses ABC method for its spare parts management and
control.
The Indian Railways have 220 stocking depots spread over zonal railways
and production units for uninterrupted supply of materials. These stocking
depots stock over 2.8 lakh spare units.
The components procured by the Indian railways is divided into two parts
1. Indigenous components which are developed within the country.
2. Imported components which are imported from the other countries.
The indigenous material has a percentage of more than 96% of the total
material procured by the railways annually. The imported material comprises
mainly of the high end technological equipment which are not readily available
in the country.
To have an effective control, the Railway Board should classify the Stores and
fixed ceilings as under:19

A1 category: It includes the spare parts having an annual usage value of

more than 5 lakh per annum, some special bearings, accurate fits, engine
blocks, fall under this category.
A2 category: It includes all the items which have an annual usage of value
between 50 thousand and 5 lakh. The stock in such cases shall not exceed
the requirement for 3 months.
B1 category: It includes all the items which have an annual usage value of
more than 25 thousand but less than 50 thousand. Stocks in such a case shall
not exceed the requirements for 6 months.
B2 category: It includes all the items having an annual usage value of more
than 10 thousand but less than 25 thousand. Stocks in such cases shall not
exceed the requirement for 3 months.
C category: All the items which have an annual usage value of less than 10
thousand fall under this category. The stocks shall not exceed the requirement
for 3 months.
D category: This category includes all the items which have not moved on for
more than 2 years.
By scrutiny of Stores Balances, it is possible to disposes Surplus Stores which
are not required and unnecessary blocking capital. The disposal of surplus
stores and scrap shall be made as per extant policy of railways.

Provision of Buffer Stock:

Board has fixed the Buffer Stock Limit of 3months for indigenous items and 6
months for imported items.
Board has decided that buffer stock limit for other items may be decided by
the COS in consultation with finance. However, it should be ensured that vital
20

and safety items should be available at the level of one month stock
requirement all the time and at the same time inventory balances should
remain within the laid down targets.

Over stocks
Overstocks are generally the quantities in excess of 50 per cent of the total
last years issues of a particular item. The formula for computation of
overstock on Zonal Railway:
For A and B category - Stock of over 12 months requirements
For C category - Stock of over 24 months requirements
The Railway wise and production units wise position of over stock items
during 1996-97 to 2000-2001, revealed that:
i.

On Northern Railway, the number of over stock items increased from

304 in 1996-97 to 8324 in 2000-2001 (increased by 26 times),

ii.

On Northeast Frontier Railway, the number of non-moving items

increased from 946 in 1996-97 to 1397 in 2000-2001 (increased by 48
per cent),

iii.

In South Central Railway, the number of over stock items increased

from 245 in 1996-97 to 895 in 2000-2001 (increased by 265 per cent).

Hence overstock needs to be monitored and the next inventory should be

carried out keeping the overstock in mind and also the shelf life of the
overstock should be monitored.
Surplus Stores of Indian Railways
The stores which have not been issued for long time only can be considered
Surplus to the requirements of the Railway. Even amongst such items there
may be some it is known could be utilized for the purpose of the Railway in
the near future. Purely temporary excesses over immediate or estimated

21

requirements are not really surpluses so long as they can be issued over a
comparatively short period of time.
The Surplus Stores could be due to the following reasons:
(a)

Stocks which have not been issued for a long time.

(b) Stocks not required by the Railways due to change in design of Plants,
Equipments and Rolling Stock.
(c)

Introduction of new Standards and Design.

(d) Spares become obsolete due to scrapping the main machinery such as
Rolling Stock and Plants.
(e)

Accumulation of non-standard items.

(f)

Materials no longer required by the Railways.

An essential prerequisite condition to declare any items of stores as Surplus

stock on Railway is that such items have not been issued for railways
consumption for a period of two years. Such Surplus stock should be
classified under two heads, viz.
(a)

Movable surplus

(b) Dead surplus

Movable Surplus: Movable surplus stores comprise items of stores which
have not been issued for a period of 24 months, it is anticipated, will be issued
in the near future. Such items should be marked in the price list.
Dead Surplus: Dead Surplus Stores comprises items of stores which have
not been issued for 24 months and which, it is considered, are not likely to be
22

utilized on any railways maintenance programme within next two years. No

item may, however may be classified as dead surplus unless it has been
duly inspected by a Survey Committee and declared as such. Such items
should be marked in the Price List.

Scrap and scrap disposal:

The stores items of different kinds which are no longer useful for the purpose
for which they were obtained by the consuming departments on Railways are
called "Scrap Items". Scrap materials are held at nominal value in the books.
Regular sale of scrap material is a must not only to fetch the best price
possible but also to avoid unnecessary accumulation, theft and pilferage.
Scrap can be divided into ordinary scrap and surplus scrap. Ordinary scrap
are materials which can ordinarily be used in the Railway Workshop or for
other Railway purposes. Surplus scrap is normally referred as dead surplus,
which should be sold off to fetch the best price possible.

Disposal of Surplus Stock

The Stores Department of every Railway is equipped with Surplus Stock
Section which deals effectively with the disposal of Surplus Stock, either by
issue, or transfer to other Railways or by sale. For issue, the consuming
departments should be asked whether the item could be utilized in the next
two years or by converting into another standard item or against another
standard item.

23

For transfer, other Railways and other Government departments should be

asked whether the item could be utilized. By sale, it could be done either sale
by tender or auction sale after the recommendation of the Survey Committee.
The Surplus Stock Section should scrutinize every public call for tender,
stores, bulletins and Home indents issued by other Railways, the Directorate
General of Supplies and Disposals or any other Government department or
public body, and in addition examine advertisements in papers, such as the
Indian Trade Journal in order to discover suitable opportunities of effecting the
sales of surplus stock and over-stocks.

Inventory Control
For the purpose of effective inventory control, stores are maintained in ABC
system.
'A' value items are closely monitored at the highest level at frequent intervals.
Their stock levels, consumption forecast etc., should be monitored every
month.
'B' value items should be monitored every quarter or every six months.
To achieve better turnover ratio, average stock of 3 months, 6 months & 12
months of 'A', 'B' & 'C' value items respectively should be kept in the Stores
Depots.
There should be an inventory control cell consisting of Stores & Accounts
officers to affect a systematic inventory control. This cell also attends to the
clearance of suspense accounts and takes prompt action to liquidate the
accumulation of scrap. Stores budget is also compiled by this section.

Out of Stock Position

24

In the ideal Inventory Management system, there should be no Out of

Stock position. Out of Stock Statement is prepared for the items having
stock position less than 5 per cent of required in case of A category items.
The out of stock target needs to be fixed by Railway Board for both Purchase
and Workshop manufactured items.It should lie around 5 per cent of the total
stock items under Category 'A'

Stores Accounting
The materials are purchased from trade or manufactured in the workshop or
returned from Division/Works. Similarly, the materials are issued to various
indentors in the Divisions chargeable to revenue/works and issued to
workshops for repairs & maintenance or for manufacturing activities or surplus
stores, scrap are sold to outsiders. To enable correct and timely accounting of
stores received and issued, efficient accounting procedure is required to be
employed of payments for materials received, credits to workshops/ works etc.
and also debits against the Divisions.

Stock Taking
Stock verification is an important managerial exercise to ensure proper and
safe store keeping. In Railways, the authorities must certify the Annual
Statement of Stores Transactions that the value balances truly reflect the
ground balances.
There should be actual physical verification, quantitative and qualitative
verification of vouchers, store accounts, comments on the state of storage,
deterioration of stock due to bad storage etc.
The Economic Order Quantity (EOQ) should also be found out for the stocks
and orders must be placed accordingly for economical efficiency. It is of key
importance that such measures are taken and surplus capital is not blocked.

Stock Verification
25

The programme as per the frequency contemplated for verification to be used

is as follows:

'A' value Items

Once in six months

'B' value Items

Once in a year

'C' value Items

Once in two years

Items that have no issue for 12 months and over

Once in a year

All Tools & Plant Items

Once in 36 months

All Imprest Stores

Once in 24 months

Machinery and plant

Once in 3 years

Computerization:
All railway data for inventory needs to be computerized, better inventory
managing softwares need to be used. In January 1984, a comprehensive
26

Material Management Information System (MMIS) for better Inventory Control

and Stores Purchase was designed by the System Development Group
(SDG), Central Railway. Such models need to be implemented everywhere in
railways. Use of new techniques to monitor the criticality of the stock kept, the
shelf life, the storage conditions and all type of data must be stored in the
database so that any inventory, before storing can easily be directed to the
concerned store without any problems and properly kept.

CONCLUSION
Inventory, inventory control and its importance were studied in detail. Various
methods and techniques were discussed. All critical and non critical aspects of
inventory control were seen. Inventory plays a very crucial role in any
organization as it marks the availability of the work in any production site while
that of spares in any running site otherwise the work could come to a grinding
halt. Stores play an important role in Railway's operations, maintenance and
in-house production activities. Effective stores management ensures timely
availability of essential items for efficient operations of the Railways with
minimum blocking of capital by timely ascertaining the needs of stores and
arranging such materials in the most efficient, economical and expeditious
manner. Stores Management encompasses the entire range of functions
which affect the flow, conservation, utilisation, quality and cost of materials.
These activities include materials planning, programming, purchasing,
27

inventory control, receiving and warehousing, transportation, materials

handling and disposal of scrap.

28