CHAPTER 1: EXECUTIVE summary

Inventory is the most excessive assets of a manufacturing company like Nalco and also the idle
resource. There are various inventory control techniques such as Economic order quantity, Reorder
point, safety stock, ABC analysis, XYZ analysis, PSN analysis, HML analysis, VED analysis, Just in Time
inventory control, perpetual inventory control and many more. Out of all these, there are some
techniques which are applied for inventory control in Nalco Smelter Plant, Angul.
Aluminium industry market shows that CY 2007 was the phenomenal year with 37.8 million tonnes
aluminium consumption against 38.1 million tonnes production, with china leading the market. But
FY 2008 faced significant fluctuation in aluminium prices mainly due to depreciating dollar and
import duly reduction.
Aluminium industry consists of primary producers and secondary fabricators. The majority users of
aluminium are sectors such as electrical, transportation, building and construction and packing
industries.
Indian aluminium industry is dominated by only five companies, One public sector unit: Nalco and
two private groups: Aditya Birla Group - Hindalco and Sterlite Industries - Balco and Malco, Hindalco
is the largest producer of aluminium and Nalco is the low cost aluminium producer, The strength of
Indian aluminium industry is the vast bauxite reserves throughout the country. Though these
industries are energy intensive, every Plant has each of its captive power plants for continuous
supply of power. Growing economy provides good and better opportunities for these indusuies.
Now coming to overview of Hindalco:















Inventory Control and Inventory management
Inventory is very vital to every Company is that without inventory no company would survive.
Inventory is meant for protection and for economy in cost. Keeping inventory of sufficient stocks
will help to face lead times component, demand and supply fluctuations and any unforeseen
circumstances in the procurement of materials. Though to have inventory is must, inventory is such
a thing that will pile up and creep into the area of profits to tum them as losses and can put the
company in red. It is therefore, necessary to have control over inventory to save the company from
piling up of inventories and to avoid losses. Better said than done is the world that suits the
inventory control.
Inventory Control Definition
Inventory control can be defined as Determining and maintaining optimum investment in inventory
given the significance of benefits and cost association with holding inventory. Inventory Control
relates to a set of policies and procedure by which an industry determines which materials it will
hold in stock and the quality of each that it will carry in stock _ Therefore inventory control is
otherwise known as STOCK CONTROL.
Objectives of Inventory Control
Inventories constitutes second largest category of all manufacturing operation exceeded only by
plant and equipment and followed by receivables. The objectives of inventory control are:
a) To keep required stock of materials so that production and maintenance activities do not suffer.
b) Minimum blockage of funds in inventory. Optimization can be achieved and efforts need to be
made to improve input output ratio of materials by scientific methods of determining.
Types of Inventories
Depending upon the types of business, generally the Inventories Varies. But in a manufacturing
industry the inventory can be classified into four broad categories:
1. Production Inventory: It contains materials purchased from market like raw materials;
Ready made parts, component, spares and also special parts and components manufactured
in their own industry and kept in stock for self-consumption for use in manufacture.
2. Maintenance, Repair & Operating Inventory: Contains materials purchased from vendors to
maintain the production process and these maintenance, repair and operating inventory do
not form part of the finished products.
3. Work in progress Inventory: This contains manufactured good kept in stores, warehouse or
retail outlets, Stock Yard for sales to consumers.
Factors Influencing Inventory
How much to buy at onetime and When to buy this quality . These are two fundamental things
on which inventory control depends. Many factors govern these fundamental things. The prime
factors that govern these two fundamental things are:
1. Requirements
2. Quality in stock or on order
3. Lead time
4. Obsolesce.
Control Maintenance and management
The essence of inventory control, broadly speaking consists of revolving the following three factors:
1. Necessity for stocking items
2. Time for reordering the items
3. Quality per order to be order.
Continuous and periodical review is required in the evaluation of inventory management and treats
it as a continuous process as costs, source of supply, availability of materials; consumption will vary
in the course of time making the previous assessment invalid. This process also helps in
standardization of materials for procurement by using near equivalents and eliminating material,
which are discontinued as a regulation, which will remove obsolescence.
Inventory Control Technique
Inventory is being maintained as a cushion in supply of materials for continuous production without
causing stock out situation. This cushion should not be suicidal to any organization. The following
scientific techniques and methods are being used in control of inventory.
1. Inventory Management Techniques
2. Standardization
3. Selective Inventory Control
4. Just In Time
5. Perpetual inventory system
6. Inventory turnover ratio
Inventory Management Techniques
An inventory related equation that determines the optimum order quantity that a company should
hold in its inventory given a set cost of production, demand rate and other variables. This is done to
minimize variable inventory costs.
If the firm is buying raw materials, it has to decide lots in which it has to be purchased on
replenishment. If the Firm is planning a production run, the issue is how much production to
schedule. These problems are called order quantity problems, and the task of the Finn is to
determine the optimum or economic order quantity.
Ordering cost:
The term ordering cost is used in case of raw materials and includes the entire costs of acquiring raw
materials.
Carrying cost:
Cost incurred for maintaining a given level of inventory is called carrying cost.
Economic Order Quantity formula
EOQ =

The total cost of inventory is given by the formula:
Total cost of inventory = ( ) (

)
()

Where A = Annual consumption (in units)
O = Ordering cost per order (in Rs)
C = Carrying cost per unit (in Rs)
P = Price per unit (in Rs)
Reorder Point
The reorder point is that inventory level at which an order should be placed to replenish the
inventory. To determine reorder point:
1. Lead time is the time normally taken in replenishing inventory after the order has been
placed
2. Average usage
3. Economic order quantity
Safety Stock
The demand for material may fluctuate from day to day. The actual delivery time may be different
from the normal lead time. If the actual usage increases or the delivery of inventory is delayed the
firm can face problem of stock out, which can be costly. So, in order to guard against the stock out
the firm may maintain a safety stock.
Standardization
Standardization is very essential to control the inventory, as by standardization reduction in variety
of material is possible. And because of the reduction in variety the advantages are low order cost,
low inventory, less storage stocks, conservation of materials, variety reduction, less paper work, easy
follow up with suppliers, less number of orders.
The importance of this field has been recognized since the days of F.W. Taylor, who first drew
attention to this fundamental need in any organization. Just as work study is necessary preliminary
to work simplification, and a basic technique for production control, quality control, materials
handling, estimated cost control, etc. Standardization is preliminary necessity to design a basic
technique on build control and standardization procedure.
SELECTIVE INVENTORY CONTROL MANAGEMENT
Any manufacturing organization consumes few thousand items of stores. A high degree of control on
inventories of each item would, therefore neither be practical considering the work involved, nor
worthwhile since all items are not of equal importance. Hence, it is desirable to classify or group
items to control, commensurate with importance. This is the principle of selective control as applied
to inventories and the technique of grouping is termed as selective technique.
Selective inventory means variation in the methods of inventory control from items to item and this
differentiation should be on selective basis by classification. A company has to stock thousands of
items of raw materials, standard parts, stores and spares, sub contract items, tools, stationery etc.
To have better control over the inventory/ stock on hand, selective inventory control technique
should be used in isolation/ or in conjunction.
Thus selective control means selecting the area of control so that required objective is achieved as
early as possible without any loss of time due to taking care of lull area -
Minimum loss of energy and efforts.
At minimum cost without loss of time.
There are following selective control techniques
1. ABC Analysis
2. PSN Analysis
3. XYZ Analysis
4. VED Analysis
5. HML Analysis
ABC Analysis
ABC analysis is a selective control technique which is required to be applied when we want to
control value of consumption of the item in rupees obviously when we want to control value of the
consumption of the material we must select those materials where consumption is very high.
In any company manufacturing, there are number of items which are consumed or traded it may run
into thousands. It is found after number of studies for different companies that
Value of consumption
items (value in Rs).
No of Items Grade
70% of consumption 10% of no. Of items A

A
20% of consumption 15% of no. Of items B

B
10% of consumption 75% of no. Of items C C

A items these are those items which are found hardly 5% 10% but their consumption may amount
70% 75% of the total money spend on materials.

B items these are those items which are generally 10% 15% of the total items and their consumption
amounts to 10% 15% of the money spend on the materials.
C items these are large number of items which are cheap and inexpensive and hence insignificant.
They are large in number s running into hardly 5% 10% of the total money spends on materials.
'A' Class Items
(High consumption value)

B Class Items
(Moderate consumption
value)

'C Class Items
(Low consumption value)

1. Very strict control

1. Moderate control

1 Loose control

2. No safety stocks or very
Low safety stocks.

2. Low safety stocks.

2 High safety stocks

3. Maximum follow up and
Expediting

3. Periodic follow up

3. Follow up and expediting in
exceptional cases

4. Rigorous value analysis 4. Moderate value analysis 4 Minimum value analysis

5. Must be handled by senior
officers

5. Can be handled by
management
5. Can be fully delegated

FSN Analysis
This type of analysis is more concerned from the point of view of movement of the item or issue of
the item or issue of the item under this type of analysis.
F items are those items, which are fast moving i.e. in a given period of time, say a month or a year
they have been issued up till number of items. Although fast moving does not necessarily mean that
these items are consumed in large quantities.
S items are those items which are slow moving in the sense that in the given period of time they
have been issued in a very limited number of time.
N non-moving items are those, which are not at all issued for a considerable period of time.
Thus, stores department whos concerned with the moving of items would like to know and classify
that the items are storing in the categories FSN. So that they can manage operate and plan stores
activity accordingly.
For example, for efficient operations it would be necessary that fast moving items as far as possible
should be stored as near as possible to the point of issue. So that it can be issued with minimum of
handling. Also such items must be stored at the floor level avoiding storing them at high heights.
Similarly, if the items ale slow moving or issued once in a while in a given period of time they can be
stored in the interior of the stores and even at the higher heights because handling of these items is
becomes very rare.
Further it is necessary for stores in charge to know about non-moving items for various reasons:
1. They mean unnecessary blockage of money and affecting the rate of returns of the
company.
2. Further they also occupy valuable space in the stores without any usefulness and therefore
it becomes necessary to identify these items and go into details and find reasons for their
non-moving and if justified to recommend to top management for their speedy disposal so
that company operations are performed efficiently.
Also inventory control to some extent can also be exercised on the basis of FSN analysis.
For example, fast moving items can be controlled more severely, particularly when their value is also
high. Similarly, slow moving items may not be controlled and reviewed very frequently since their
consumption may not be frequent and their value may not be high.
XYZ Analysis
This type of analysis is carried out from the point of view of value of balance stocks lying in the
stores from time to time and classifies all the items as given below.
The items covering first 70% of annual inventory value are categorized as CategoryX . Category Y
items are those, which covers next 20% of the annual inventory value and balance 10% annual
inventory shall be categorized as Category Z.

Classification of items should be dynamic and system devised, so that accurate classification can be
had for analysis purpose. XYZ analysis report indicating inventory and no of items in each category
need to be reviewed on annual basis.

After knowing this type of classifications and their items can be taken to control the situation as
shown below:
1. From security point of view high value items must be stored and kept under lock and key or
if not possible they should be kept in such a way that they are always under supervision.
Similarly arrangement can be made for y and z items accordingly.
2. From inventory control point of view we must know why there is high inventory for X
items. We should review inventory control procedure for each and every high item because
stock should be maintained to take care of lead time consumption and also to provide safety
stocks. For high value items lying in stores we should review the reasons for long lead time
as well as demand variations and see whether lead time consumption and safety stocks can
be reduced. Thus proper inventory control procedures can be developed on the basis of XYZ
analysis.
Thus proper selective control methods should be selected to control the materials and prevent from
facing loss, taking advantage and knowing what exactly is to be done.
VED Analysis
VED analysis is carried out to control situation, which are critical. When applied to material in VED
analysis we try to identify material according to their criticality to the production, which means the
material, without which the production will come to stop and so on from this point of view material
classified into three categories.
V-Vitals are those items, absence of which can lead to stoppage of the production activity.
E-Essentials are those items, absence of which can hamper/decrease the production.
D-Desirables are those items which are primarily required during shut down / preventive
maintenance activities.
Advantage:
Since the judgment is made by user and accountability for consumption is also lies with the user
therefore items are categorized more cautiously resulting in the control of inventory for VED items.

Vital categories of the items are those items for the want of which the production will come to stop.
For e.g. Power in the factory.
Essential group of items are those items because of non-availability of which the stock out cost is
very high.
Desirable group of items are those items because of non-availability of which there is no immediate
loss of production and stock cost is very less and it may cause minor disruption in the production for
a short time.
HML Analysis
This analysis, analysis the material according to their prices and then classifies them as H items or M
items or L items.
H stands for high price,
L stands for low price and
M stands for medium price.
Since price is more concerned of purchase department mostly purchase department people analyses
the material according to HML analysis.
When it is desired to evolve purchasing policies then also HML analysis is carried out i.e.
whether to purchase in exact quantities as required or to purchase in EOQ or purchase only
when absolutely necessary.

When the objective is to keep control over consumption at the department level then
authorization to draw materials from the stores will be given to high level H item, low level
for L items and medium level for M item.

When it is desired to decide frequency of stock taking then very frequently H category, very
rarely L category and averagely M category.

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

Just In Time
Just in Time (JIT) is a production and inventory control system in which materials are purchased and
units are produced only as needed to meet actual customer demand.

When Companies use Just in Time (JIT) manufacturing and inventory control system, they purchase
materials and produce units only as needed to meet production demand. In just in time
manufacturing system inventories are reduced to the minimum and in some cases is zero. JIT
approach can be used in both manufacturing and merchandising companies. It has the most
profound effects, however, on the operations of manufacturing companies which maintain three
class of inventories-raw material, Work in process, and finished goods.
Traditionally, manufacturing companies have maintained large amounts of all three types of
inventories to act as buffers so that operations can proceed smoothly even if there are unanticipated
disruptions. Raw materials inventories provide insurance in case suppliers are late with deliveries.
Work in process inventories are maintained in case a work station is unable to operate due to a
breakdown or other reason. Finished goods inventories are maintained to accommodate
unanticipated fluctuations in demand. While these inventories provide buffers against unforeseen
events, they have a cost. In addition to the money tied up in the inventories, expert argue that the
presence of inventories encourages inefficient and sloppy work, results in too many defects, and
dramatically increase the amount of time required to complete a product.

Just in time purchasing recognizes too much carrying costs associated with holding high inventory
levels. Therefore, it advocates developing good relations with suppliers and making timely purchases
from proven suppliers who can make ready delivery of goods available as and when need arises.
EOQ model assumes a constant order quantity whereas .TIT purchasing policy advocates a different
quantity for each order if demand fluctuates. EOQ lays emphasis on ordering and carrying costs but
inventory management extends beyond carrying and ordering costs to include purchase costs quality
costs and stock out. Just in time purchasing takes into consideration all these costs and move
outside the assumptions of the EOQ model.


Advantages of JIT purchasing
l. Investment in inventory is reduced because more frequent purchase orders of small quantities are
made.
2. Carrying cost is reduced as a result of low investment in inventory.
3. A reduction in the number of suppliers to be dealt with is possible. Only proven suppliers who can
give quick delivery of quality goods are given purchase orders. As a result of this reduction in
negotiation time is possible. The use of long-run contracts with some suppliers with minimal paper
Work involved is possible.
Perpetual Inventory Systems
The Chartered Institute of Management Accountants, London, defines the perpetual inventory as a
system of records maintained by the controlling department, which reflects the physical movements
of stocks and their current balance. Bind cards and the stores ledger help the movements of the
stock on the receipts and in maintaining this system as they make a record of two physical
movements of the stocks on the receipts and issues of the materials and also reflect the balance in
the stores. Thus, it is a system of ascertaining balance after every receipt and issue of materials
through stock record to facilitate regular checking and to avoid closing down the form for
stocktaking. To ensure the accuracy of perpetual inventory records (i.e. Bin card and stores ledger),
physical verification of the stores is made by bin cards or stores ledger may differ from the actual
balance of stock as ascertained by physical verification. It may be done to the following avoidable
and unavoidable causes.