COMPANY PROFILE OF JAYPEE GROUP

The Jaypee Group is a well-diversified infrastructure industrial group of

India with a turnover of over Rs.4000 cores that commenced its operation in

1972 as a partnership firm then known as Jaypee Associates Limited (JAL),

under the visionary leadership of Shri Jaiprakash Gaur. In August 1986, the

construction company and the cement division were merged into the Jaiprakash

Associates Limited.

The group has been discharging its responsibilities to the satisfaction of

all its shareholders and fellow Indians, summed by its guiding philosophy of

“Growth with a Human Face”. This is the main objective of the company,

which means that the company not only wants its growth, but at the same time

they work for their employee’s growth also.

The group is well diversified conglomerate with active interest in the

areas of civil engineering, design & construction for hydropower & river valley

projects, development of private hydro power projects, cement manufacturing,

hospitality, business development and management of golf resort, expressways

and highways, real estate development information technology and educational

institutes.

VISION OF THE COMPANY:-

“To be amongst most trusted power utility company by providing

environment friendly power on most cost effective basis, ensuring prosperity

for its stakeholders and growth with human face.”

MISSION OF THE COMPANY: -

To achieve excellence in every activity we undertake.

To ensure most cost effective power for sustained growth of India.

To inculcate value system across the organization for ensuring

trustworthy relationship with associates and stake holders.

To be committed towards the safety and health of employees and the

public. The main motto of the company is Work for Safe, Healthy, and

Clean & Green Environment.

1

BUSINESS CONCERNS OF JAYPEE GROUP

2

Civil Engineering Private Hydro Power Hospitality

Information Technology

Cement Division

Thermal Station Transmission Lines Social Work

A) The Cement Division of JAL :-

The Jaypee Group is the fourth largest cement producer in the company. It is

located at Rewa, Madhya Pradesh (has 2-plants and a grinding & a blending

unit), with an aggregate production capacity of 7-million tones per annum. This

is the single largest complex of cement at one location in India. Several new

projects are coming up in this division, which wills tale the capacity about 24

MTPA by 2009.

JAIPRAKASH ASSOCIATES LIMITED - CEMENT DIVISION

As JIL (Jaiprakash Industries Limited) and JCL (Jaypee Cement Limited)

were two separate companies in the group, carrying on the engineering &

construction (E&C) and cement manufacturing & marketing business

respectively. With a view to consolidate the construction and cement

operations under one company, The Jaypee Rewa Plant group merged the JIL

into JCL with the approval of the scheme of Amalgamation from the High

Court of Allah bad on March 11, 2004. The merger was effective from April 1,

2004. Subsequently, the name of the merged entity has been changed to

Jaiprakash Associates Ltd. (JAL).

VISION OF THE CEMENT DIVISION:-

“To be dynamic & vibrant, responsive to change scenario and flexible

enough to absorb environment & physical fluctuation. Harness the inherent

strength of available human resources and materials has the capacity to learn

from success and more then anything else, ensure growth with human face.”

MISSION OF THE CEMENT DIVISION:-

To ensure growth for improving the quality of life with human face and

contribute to growing national economy, maximizing benefits to their

customers and the nation at large by serving the core sectors of the economy.

WORKS IN PROGRESS- Presently the Company is executing works of the

following projects:

3

S.

No.

Name of the project

under execution

Location of the

Project

Contract Price/

Estimated

Project cost

(Base Value)

(Rs.In crores)

Power

Generati

ng

Capacity

of the

Project

(MW)

Works Pertaining to:

1. Baglihar-I & II, HEP Jammu &

Kashmir

2,152 900

2. Teesta –V HEP Sikkim 686 510

3. Karcham Wangtoo HEP Himachal Pradesh 4,150 1,000

4. Omkareshwar HEP Madhya Pradesh 880 520

5. Civil works including

tunnels etc. in Zone-III of

Laole-Quazigund section

Jammu &

Kashmir

168 Railway

Line

6. Turnkey construction of

Srisailam Left Bank Canal

Tunnel Scheme including

Head Regulator etc. of

Alimineti Madhava Reddy

Project

Andhra Pradesh 1,925 Irrigation

Tunnels

7. Taj Expressway (165 Km)

connecting Noida & Agra

and related activities

Uttar Pradesh

(NCR)

20,000 Express

way &

Real

Estate

4

Project

8. Turnkey execution of 1600

MW Siang Lower Hydro-

electric Project on BOOT

basis

Arunachal

Pradesh

5,000 1,600

9.Turnkey execution of 500

MW Hirong Hydro-electric

Project on BOOT basis

Arunachal

Pradesh

1,500 500

10. Zirakpur-Parwanoo

Highway From Km 39,860

to Km 67,000 Of NH – 22

on BOT basis

Punjab, Haryana

& Himachal

Pradesh

412 Highway

Project

with toll

collectio

n –

concessi

on period

of 20

years

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Projects being executed in Joint Venture with JAL being the Leader-

S.

No.

Name of the project

under execution

Location of

the project

Contract

Price/

Estimated

Project cost

(Base Value)

(Rs. In

crores)

Power

Generating

Capacity of

the Project

(MW)

11. Sri Rama Sagar

Project Flood Flow

Canal Package - 2

Andhra

Pradesh

187Irrigation

Canal

12. Polavaram Project

Right Main Canal

Package - 4

Andhra

Pradesh

301 Irrigation

Canal

13. Veligonda Feeder and

Teegaleru Canal

Project - 2

Andhra

Pradesh

254 Irrigation

Canal

14. Rajiv Sagar Lift

Irrigation Project

(Dummugudem)

Andhra

Pradesh

282 Lift

Irrigation

Project

15. GNSS Main Canal

from Km. 119,000 to

Km. 141,350 including

construction of CM &

CD works

Andhra

Pradesh

112 Irrigation

Canal

Total 38,009 5,030 MW

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The progress of work on all projects is generally satisfactory.

The group produces Ordinary Portland Cement (OPC) (grades 33,

44, 53, IRST-40) and Pozzolana Portland Cement (PPC) under the brand

names “Buland”, “Buniyad” and “Tiger” .Its cement division has three

modern, computerized process control cement plants namely, Jaypee Rewa

Plant (JRP), Jaypee Rewa Plant (JBP) with an aggregate capacity of 7.0

MTPA. With its plans of adding capacities in different regions of the country,

the group is poised to be a 24 MTPA cement producer by the year 2009. These

will be attained with the help of following plant: -

Jaypee Sidhi Plant – Location Baghwar Sidhi (M.P.)

Dalla Cement Plant – Location U.P.

Chunnar Cement Plant – Location U.P.

In Satna and Bhilai Slag Cement plant is going to be installed there.

In Himachal Pradesh also the Cement Plant are under construction.

The two plants (JRP, JBP) have received the ISO 9002 & ISO 14000

& ISO 14001 certification from the world-renowned crediting agency BVQI.

They are also the largest exporter of cement and clinker to Nepal from last 6

years.

EXISTING OPERATING UNIT OF JAL (CEMENT DIVISION):-

A) Jaypee Rewa Plant:

Jaypee Rewa plant has 2 units with an aggregate capacity of 3.2 million

tones per annum Unit-I of 1 million tones capacity was commissioned in 1986

and Unit-II and 1.5 million tones capacity was commissioned in 1991.

B) Jaypee Rewa Plant:

Jaypee Rewa Plant, the second plant with the capacity of 2.2 MTPA

(Million Tones Per annum) commissioned in 1996. This plant is exempted

from paying the excise duty on its production for 10 years from the date of its

commencement.

C) Jaypee Cement Blending Unit, Sadwa, Allahabad (JCBU):

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Jaypee Cement Blending unit (JCBU) of 0.6 MTPA capacities was

commissioned in December. 2002 at the Village Sadwa-Khurd, District

Allahabad, (UP). This is situated on Allahabad - Rewa road at a distance of 28

KM from Allahabad.

D) Jaypee Ayodhya Grinding Operations (JAAGO):

The latest addition in cement manufacturing capacity came through

Jaypee Ayodhya Grinding Operation (JAAGO) having 1.0 MTPA capacity.

With a view to the locally procured Fly Ash from NTPC - Tanda, this plant was

commissioned in August 2004 at Tanda in U.P.

E) Bhilai Jaypee Cement Limited (BJCL):

Incorporated in the state of Chhattisgah as a Joint Venture with steel

Authority of India Ltd, (SAIL). The said company is to produc e 2.2 MTPA of

cement at Bhilai and Satna

F) Jaypee Cement Limited (JCL):

JCL recently acquied Gujarat Anjan Cement with a capacity of

1.2MTPA at Bhuj, Gujarat. The company is also exploring further

opportunities of setting up / acquiring new / existing cement plants in India

G) Gujarat Anjan Cement Limited (GACL):

This Company, a subsidiary of Jaypee Cement Limited is setting up a

cement of 1.2 MTPA capacities at village Vayor, Taluka Abdasa, Distt. Kutch

in Gujanrat.

The company is having the need of the limestone to meet that

requirements they have established their Captive Limestone Mines. The three

mining centers they have to meet their requirements are as follows: -

Naubasta Limestone Mine

Jaypee Limestone Mine

Bankuiyan Limestone Mine

The systematic and scientific mining operations of Jaiprakash

Associates Limited are supported with the help of Holder Bank Management

Consultancy (HMC), Switzerland by state-of-the art computerized

programming – the Computer Aided Deposit Evaluation (CADE) & Quarry

Scheduling Optimisation (QSO).

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MANAGEMENT OF WORK :-

All the operations of cement is computerized through an ERP

(Enterprise Resource Planning) Software containing modules for Inventory,

Purchase, Finance, Sales & Distribution, Costing, Excise & Taxation, HR &

Payroll and MIS. These modules are fully integrated and any entry made in one

module is readily available in another module.

This ERP is working on an online entry concept, where all the transaction

points are feeding real time data on to the Central Server available at

Sahibabad.

B) Civil Engineering :-

The subsidiaries name which is involves in field of engineering is

Jaiprakash Engineering Ltd (J.E.L.) and Jaypee Ventures Ltd

(J.V.L.) .The Company is currently executing various projects in hydropower/

irrigation/ other infrastructure fields and has had the distinction of executing

simultaneously 13 hydropower projects spread over 6 states and the

neighboring country Bhutan for generating 10,290 MW of power. This is the

only engineering company in India to be assigned “CR1” grade by the credit

rating agency (ICRA) and the Construction Industry development Council

(CIDC).

C) Private Hydro Power :-

Jaiprakash Hydro Power Ltd (J.H.P.L.), Jaiprakash Power Ventures

Ltd (J.P.V.L) and Jaypee Karcham Hydro Corporation Ltd (J.K.H.C.L.)

are the three subsidiaries of JIL for the development of Baspa-II,

Vishnuprayag and the Karcham-Wangtoo Hydroelectric Projects

respectively.

D) Hospitality :-

The group owns and operates five Five Star Deluxe Hotel through

Jaypee Hotels Ltd (J.H.L.), as subsidiary company and is significant player in

north of Indian. The not only tap of the opportunity in tourism sector but also to

propagate rich heritage of India’s culture, tradition and value they interred into

this sector. The hotels of Jaypee Group are as follows: -

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Hotel Siddharth: A five star deluxe hotel at New Delhi.

Hotel Vasant Continental: A five star deluxe hotel at New Delhi.

Hotel Residency Manor : A five star deluxe hotel at Mussorie

Hotel Jaypee Palace: A five star deluxe hotel at Agra.

Jaypee Greens Ltd: A Golf resort at Greater Noida but now it is

merged in Jaypee Associated Ltd.

E) Information Technology :-

Focus is consistently placed on automation techniques that increase the

productivity and profitability of the enterprise with reduced costs across

various functional heads. The Software development centre is at Sahibabad. IT

is an enabler in this context. With this vision in mind JIL Information

Technology Limited (JILIT) was born. It specializes in the following fields:

Hardware & Networking

Multimedia Services & Software

Enterprise Resource Planning

F) Thermal :-

The Group in the recent years in order to diversify from the hydropower

sector has taken up the task of exploiting the rich coal resources that exist

within the state of Madhya Pradesh. To this effect to company has formed a

Joint Venture company with Madhya Pradesh State Mining Corporation

Limited (MPSMCL) to undertake coal production and sale of coal from coal

block/blocks, which might be allotted to MPSMCL. The joint venture has been

formed in the name and style of MADHYA PRADESH JAYPEE

MINERALS LIMITED.

Transmission System :-

The Jaiprakash Hydro-Power Limited (JHPL), subsidiary of

Jaiprakash Associates Limited will venture into the development of

transmission systems with the Power Grid Corporation of India Ltd

(PGCIL). The Memorandum of understanding between PGCIL and JHPL has

been signed with the purpose of formation of a Joint Venture company to lay a

230 km (approx.) long transmission system to evacuate power from the 1000

MW Karcham-Wangtoo Hydro Electric Project in Himachal Pradesh.

10

DEPARTMENTAL PROFILE

Finance and account department

The Finance and accounts departments works as a judicious manager in

distribution of available funds in an optimal manner for the organization as a

whole on daily, monthly and annual basis and also a conscious book keeper for

the company going through every transaction having financial implication with

complete thoroughness without acceptance of liability. It also looks after the

information requirements of the company and various statutory authorities in

compliance of the applicable statutory provisions. The onus of ensuring

company’s various assets adequately insured is also with this department. This

Department is bifurcated on functional basis into sections as under:

FINANCE AND ACCOUNTS DEPARTMENT

FINANCE ACCOUNTS

SALES GENERAL INSURANCE

M.I.S

RAW PERSONNEL

MATERIAL & STORE ACCOUNTING

ACCOUNTING

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GENERAL ACCOUNTS:

This section is divided into two different subsections, viz.

1. Raw Material & Stores Accounting etc.

2. Personal related accounting.

The responsibility of each subsection is as under:

RAW MATERIAL & STORES ACCOUNTING

Raw material accounting.

Stores and Spares accounting. It involves valuation of computerized

Goods Received Notes received from Stores, in the computerized

Stores system, for dully-passed bills.

Reconciliation of inter-office accounts.

Maintenance of Raw Materials, Stores and Spares Suppliers Ledgers and

their account reconciliation.

Timely compliance of provisions related to tax deducted at source on

accounts maintained by this section.

Preparation of details for monthly consumption of raw materials., stores

and spares and getting the consumption vouchers passed and entered in

the system.

Preparation of quarterly financial statements in compliance with

applicable statutory provisions.

Getting the accounts audited by internal auditors.

Preparations of annual financial statements and getting in audited by

statutory auditor.

Preparation of cost audit report getting it audited by cost audited.

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INTRODUCTION OF THE TOPIC

Material management is concept which aims at a company wide,

integrated approach towards the management of materials in an Industrial

undertaking-Its objective is primarily COST-REDUCTION and EFFICIENT

handling of materials at all stages and in all parts of the undertaking.

It is body of knowledge which helps the manager to improve the

productivity of capital by reduceing material cost, preventing large amount of

capital being locked up for long time periods, and IMPROVING THE

CAPITAL TURNOVER RATIO.

It covers the whole range of functions involved in converting raw

materials and ancillary supplies into finished products.

MATERIAL MANAGEMENT :

The fast developing Indian economy has placed before the materials

manager a tremendous challenge and responsibility. The task is really

herculean when we recognise that more than Rs. 15,000 crores worth of

materials and components per annum go into the production channels of which

imports alone constitute about Rs. 3,000 crores. The challenge he faces is all

the more thugh as the money tied up in inventory aggregates Rs. 15,000 crores,

of which obsolete materials lock up funds to the tune of Rs. 2,500 crores.* The

largest Central Purchasing Organisation in the country, namely, the Directorate

General of Supplies and Disposal, buys over Rs. 1,200 crores worth of

materials per year.

In many organisations, materials form the largest single expenditure item. An analysis of the financial statements of a large number of priveat and public sector organisations indicates that materials account for nearly 60 per cent of the total expenditure.

Materials form an important part of the current assets in any organisation. The Return on Investment (ROI) depends a great deal on the manner of utilisation of materials. The relationship is represented below:

Profit Sales

Sales Fixed Assets + Current Assets

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ROI =

Fixed assets constitute capital already sunk and the only scope for

improving the return on investment lies therefore in the effcient management of

materials which constitute the bulk of the current assets. Therefore, in this

context, the control of materials assumes great importance.

OBJECTIVES OF MATERIALS MANAGEMENT :

Materials management is a staff function and has to support the

objectives of the undertaking as a whole.

Maintaining continuity of productive operations by ensuring uniform

flow of materials.

Reducing material cost by systematic use of scientific techniques.

Releasing working capital for productive purposes, by efficient control

of inventories.

Increasing the competetiveness of end products by ensuring right quality

at right price.

Import substitution, economic use of foreign purchases for saving forign

exchange.

Establishing good buyer-seller relationships.

Ensuring low department costs and high efficiency.

Setting high ethical standards.

SCOPE OF MATERIAL MANAGEMENT :

Materials management as the function responsible for the co-ordination

of planning, sourcing, pruchasing, moving, storing and controlling materials in

an optimum manner so as to provide a pre-decided service to the customer at a

minimum cost.

PRODUCTION CONTROL :

It is not a usual practice, generally is under P.P.C. function of

production department.

It was in use at GEC (USA) – they are manufacturing a large number of

items for which large number of items are required to be purchased, from their

sub contractors.

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TRANSPORTATION :

As on date, incoming material transportation is managed by materials

manager and outgoing material transportation is with marketing or

transportation department. But, there is an increasing trend to place both

incoming and outgoing materials transportation under materials manager in

many undertakings.

MATERIAL HANDLING :

To reduce material handling cost one should make the materials

department responsible for this function throughout the undertaking. This

enables materials manager to keep a close control over handling costs and

reduce them year by year.

SCRAP DISPOSAL :

Important fucntion of disposal of scrap and surplus is best done by the

materials manager or the purchase officer who is familiar with market trends of

all materials. This function is invariably intrested to him. Q.C. & INSP.

Department to work in close co-operation with materials dept. for INSP. of

Incoming materials.

IMPORTANCE OF MATERIALS MANAGEMENT :

Materials account for 60 to 64% fo the sales value of a produce hence

small change in material costs can result in large sum of money saved or

lost.

The balance 36% accounts for wages and salaries, overheads and profits.

Inventory carrying costs, briefly comprises of, interest charges ont he

cost of inventory, storage and handling costs, cost of insurance, and

physical deterioration and obsolescence costs.

All these amounts to stleast 20% of the materials costs. These are hidden

costs generally covered by overheads.

So the total material cost will amount to be :

64% + ( 20% of 64 or 12.8%) = 76.8 say 77% of the sales revenue.

Hence, the inventories should be controlled to the minimum possible.

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ADVANTAGES IN INTEGRATED MATERIALS MANAGEMENT

CONCEPT :

Organsiation which have gone in a big way for the integrated materials

management usually enjoy the following advantages:

Better Accountability : Through centralisation of authority and

responsibility for all aspects of materials function, a clear cut

accountability is established. Various user departments can direct their

problems with regard to materials to one central point so that action can

be taken immediately. This helps in evaluating the performance of

materials amangement in an objective manner.

Better Corrdination: When a central materials manager is responsible

for all functions, the departments under the materials manager create an

identity which is connon. This results in better support and cooperation

in the accomplishment of the materials function. The user departments

also find that they have to apporach one department for discussing and

solving their materials problems. This creates an atmosphere of trust and

generally better relations between the user depatments and the materials

management department.

Better Performance : As all the inter-related function are integrated

organisationally, promptly speed and accuracy results in

communication. Need for materials is promptly brought to notice by

materials planning. Purchase department is fed with stock levels and

order status by stores and inventory control departments. All this calls

for judicious decisions leading to lower costs, better inventory turnover,

reduced stock-outs, reduced lead times and a general reduction in paper

work.

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ORGANISATION AND CONTROL :

The integrated materials management concept requires central co-

ordination of all these inter-related activities. Therefore the internal structuring

of the various functions well as the relationship of the materials management

division with the other divisions-technical, finance and marketing-in the overall

organisation becomes critical. The materials management function ought to be

headed by a competent professional who must be a member of the top

management team as managing materials is a critical function.

MATERIALS MANAGEMENT IN THE OVERALL COMPANY

ORGANISATION :JRP

HEAD OF DEPARTMENT

17

Head of Stores

Head of Purchase

Head of Raw material

Head of Finance

Inventory management

Inventory management involves buying the right quantity of the right

quality at the right price and at the right time. The objective of Inventory

Management is to ensure optimum procurement and stocking of materials, so

that there are neither any stock-outs nor any excess inventory being carried at

any point of time. The goal of the effective inventory management is to

minimize the cost of direct and indirect that are associated with holding

inventories, managing the inventories or stock in any company is vital process

in a firm.

The cost of capital blocked in inventory for meeting the requirements

and the demands is substantial. This part of working capital needs to be

effectively managed to avoid the enormous losses. Inventory consist of two

major aspects that are right quantity and right quality to be managed rightly

because the cost involved in the proper handling of stock is a large investment

of the firm that needs to be managed appropriately. A company invest more

than a half of its working in inventory. For example Jaypee invest more than Rs

59,967Lacs on inventory. This is the reason for effective management of

inventory in any company.

INVENTORY : AS ESSENTIAL REQUIREMENT

Inventory is a part and parcel of every facet of business life. Without it,

no business activity can be performed, whether, it being a service organization

like hospitals, and banks etc. or manufacturing or trading organizations.

Irrespective of the specific organizational setting, inventories are reflected by

way of a conversion process of inputs to outputs. This is illustrated in Figure In

fact, inventory is maintained for flow of operations in the production process.

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Random Fluctuations

Inputs Inventory Conversion Process Comparing

actual

Work-in-Process Material stock

levels

Inventory to planned levels

Material (Stock-points)

Stock-points

Output

Land

Labour

Capital Product Inventory

Management Stock-points

Feed back

One can see that there may be stock-points at the input (raw material),

conversion (work-in-process), and output (product) stages. Looking at the

conversion process where inputs and outputs are based on the market situations

of uncertainly, it becomes physically impossible and economically impractical

for each stock item to arrive exactly where it is needed, it may be prohibitively

expensive. This is the fundamental reason for carrying the inventories. Thus,

inventories play an essential and pervasive role in any organization

19

CLASSIFICATIONS OF INVENTORY

Inventory may be classified into manufacturing, service and control aspects.

This is exhibited in figure. A detailed discussion of each of three classification

is discussed below.

Inventory Classification

Manufacturing Aspect Service Aspects Control

Aspects

Raw Materials Work-in- Finished Lot size Fluctuation A-items B-items

C-items

or production Process Goods Stocks Stocks Inventory Inventory

Inventory

Inventory Inventory Inventory

M.R.O. Miscellaneous Anticipation Risk

Inventory Inventory Stocks Stocks

1) Manufacturing Inventory

Inventory held by a manufacturing concern is mainly of five types:

a) Production Inventory

Items going into final product such as raw materials, components and sub-

assemblies purchased from outside form production inventory.

b) Work-in-Process Inventory

Under this all items in semi-finished form or products at different stage of

production.

c) Finished Goods Inventory

This includes the products ready for dispatch to users or to distributors.

20

d) MRO Inventory

Maintenance, repairs and operating supplies like spare parts and

consumable stores, which do not go into final product but are consumed in

the production process.

e) Miscellaneous Inventory

Items other than these mentioned above, such as scrap, obsolete, and

unsolvable products arising from main production, stationery used in office

and other items needed by office, factory and sales department, etc.

2) Service Inventory

This consists of four classes:

a) Lot size

This means purchasing in lots. This is resorted to

i) Obtain quantity discounts.

ii) Reduce transportation and purchase costs.

iii) Minimize handling and receiving costs.

It would be uneconomical for a textile unit to by cotton everyday rather

than in bulk during the cotton season.

b) Anticipation Stocks

These are kept to meet predictable changes in demand or in availability of

raw materials. The purchase of potatoes in the potato season for sale of

roots preservation products throughout the year is an example of this kind.

c) Fluctuation Stocks

These are carried to ensure ready supplies to consumers or customers in the

face of irregular fluctuations in their demands.

d) Risk Stocks

These are the items needed to ensure that there is no risk of complete

breakdown of production. These are items with long lead time for supply

but are vital and critical for production.

e) Control of Inventory (ABC classification)

A good start in examining an inventory control system is to make ABC

classification. It is known as ABC analysis which means the ‘Control’ will

be ‘Always Better’ if we start with ABC of inventory. This concept divides

21

inventories into three groupings in terms of percentage of number of items

and percentage of total value as given in figures.

INVENTORY MANAGEMENT:

The dictionary meaning of ‘Inventory Management’ is “Stock of goods.”

Inventories are the list of the goods and material which are available in

Business.

COMPONENT OF INVENTORY MANAGEMENT :

Manufacturing organization generally divide their ‘goods for sale’

inventory into following :-

RAW MATERIAL: Material and component which is use for making product/

finished good. In Jaypee Rewa Plant raw material are gypsum, flyash, lime

stone.

WORK IN PROGRESS, WIP: Material and component that had began to be

transformed into finished goods.

FINISHED GOODS: The product which is ready to sale to customer. Cement

is the finished good.

INVENTORY CONTROLS

Inventory controls not only serve the acute problems of liquidity but

also increase profits and cause substantial reduction in the working capital of

the concern. In JAL the following method is adopted in inventory control, these

methods based traditional inventory control system, which adopted by many

companies since 18 century.

Stock levels

Determination of safety stock,

System of ordering the inventories,

Preparation of inventory Report

1) Stock levels:

Carrying out too much and too littlie of inventories is demented to the

firms. If the inventory is too little the firm will have face frequent stock outs in

evolving heavy ordering cost and if the inventory level is too high it will be

unnecessary tie-up capital. Therefore an efficient inventory management

requires that firm should maintain an optimum level of inventory where

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inventory cost are the minimum and at the same time there is no stock out

which may result in loss of sale or stoppage of production .

a) Minimum Level:

The quantities which must be maintained in the hand at all time, it is

calculated in JAL by there own formula:

Minimum level = Last year consumption

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The last year consumption of any particular stock divide by 12 months,

Thus JAL able to calculate their minimum level, which is one month on the

basis of time, Quantity according to use.

b) Lead Time:

JAL require some time to process the order and time is also required by

the supplying firm to excite The order, this lead time is on average basis is 15

days as per information provided by official of JAL.

c) Rate of Consumption:

It is an average consumption of material in the factory; In JAL the

average inventory consumption is 3 months.

d) Nature of Material:

The nature of material also affects the minimum level like coal before

the monsoon season we required to make large stock of coal, which is major

fuel for production of cement.

e) Re-ordering Level:

When the quantity of any material reaches a certain figure then fresh

order is placed to get the material again. The order is sent before the material

reach minimum stock. Reordering level is or ordering level is fixed between

minimums level and maximum level. The method which is adopted by JAL is

measure re-ordering level:

Re-ordering Level = Last year consumption of inventories

5

The period, which is, define for re-order level In JAL is 2 months & 15 days.

f) Maximum Level:

23

It is the quantity of materials beyond which firm should not exceed its

stocks. If the quantity exceeds maximum level limit then it will be the over

stocking. So JAL store department takes high care of these things, procure the

opportunity cost is well being way. Overstocking will mean blocking of more

capital. In JAL maximum level depends upon the following factors:

(1) The availability of capital for the purchase of materials.

(2) The possibilities of fluctuation of prices.

(3) Availability of materials. if the material are available only during the

seasons then they will have to stored for rest of of the period.

(4) The maximum requirements of material at any point of time.

(5) Restrictions imposed by the government. Some times government fixes the

maximum quantity of material. The limit fixed by government will become the

limiting factor and maximum level cannot be fixed more than this limits.

(6) The possibility of changing the fashions will also affect the maximum level.

In JaiPrakash Associates ltd, calculation of the maximum level is done by using

the following formula:

Maximum Level = Last year consumption of inventories

3

In Jai Prakash Associates ltd. the maximum period for store keeping is 3

month.

g) Danger Level:

It is the level beyond which materials should not fall in any case .If

danger level arises then immediate steps should be taken to replenish the stocks

even if more cost is incurred for arranging the materials.

2) Determination of Safety Stocks:

Safety stock is used to meet some unanticipated increase in usage. The

usage of inventory cannot be perfectly forecasted. It fluctuates over period of

time. Thus optimum level of safety stock involves a trade off between the cost

of stock-outs and the carrying cost of safety stock.

3) Ordering Systems of Inventory:

24

The basic problem of inventory is to decide re order point. In Jaypee

Associates ltd. they determined with the help of this things:

(a) Average consumption rate,

(b) Duration of lead-time,

(c) Economic orders quantity.

When the inventory is depleted to lead time consumption the order should be

placed in following order:

(1) Preparation of Master Indent form by the respective department of JAL

(2) Then purchase requisition released by purchase department (PR

formation).

(3) Then purchase department placed orders to suppliers after negating the

price (P.O. formation)

(4) Formation of Good received & its registration will take place.

(5) Then Valuation of inventory (Goods received by P.O.) takes place.

(6) Then costing process takes place

(7) To payment of party (to party accrual A/C)

(8) Registration of bill

(9) Final payment of bill to supplier takes place.

This is a process in Jai Prakash Associates ltd.

4) Inventory Reports:

From effective inventory control, the management should be kept

informed with latest stock position of different items. This is done by preparing

periodical inventory reports.

a) Economic Order Quantity:

A decision about how much to order has great significance in inventory

management. The quantity to be purchased should neither be small nor big

because costs of buying and carrying materials are very high. Economic order

quantity is the size of the lot to be purchased which is economically viable.

This is the quantity of materials which can be purchased at minimum costs.

Generally, Economic order quantity is the point at which inventory carrying

costs are equal to order costs. The whole inventory management in JAL

considers the two basic points related with EOQ are:

25

b) Ordering costs:

These are the costs which are associated with the purchasing or ordering

of materials. These costs include:

Cost of staff posted for ordering of goods .A purchase order is processed and

then placed with suppliers. The labor spent on this process is included in

ordering costs.

Inspection costs of incoming material.

Cost of stationery, typing postage, telephone charges, etc.

These costs are known as buying costs and will arise when some purchase are

being made.

c) Carrying costs:

These are the cost for holding the inventories; these costs will not be

incurred if

inventories are not carried. These costs include:

The cost of capital invested in inventories. An interest will be paid on

the amount locked up in inventories.

Cost of storage, which could have been used for other purpose.

Insurance cost.

Cost of spoilage in handling material.

All these factors are always been considered in JAL for proper inventory

control.

OTHER PURPOSE OF KEEPING STOCK ARE:

Avoiding lost sales.

Gaining quantity discounts.

Reducing order costs/reorder cost at times of price fluctuations ie

speculative motive.

Achieving efficient production runs.

Reducing risk of production shortage ie precautionary motive.

Transaction motive facilitates continue production and timely execution of sales.

INVENTORY CONTROL.

26

INVENTORY NORMS FOR STORES & SPARES

“Inventory norm” 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.

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 pattern, the future, market availability and the service level

promised to be provided to the end user.

Keeping the above guiding factors in view, following inventory norms

have been proposed for adoption in Jaiprakash Associates Limited. These will

need review thereafter on the basis of working experience expected to be then

available.

INVENTORY NORMS FOR SPECIFIED CATEGORIES OF STORES AND

SPARES.

1. Fuel 10 Days usage

2. Spares (Excluding Insurance

and Unit replacement spares)

12 months usage Indigenous

24 months imported.

3. Loose Tools 6 months usage

4. Chemicals, Gases & Explosives 1 month usage

5. Oil & Lubricants 3 month usage

6. Stores other than spares

(Consumables & Gen. Stores)

3 month usage

7. Scrap 6 months arising (at least two disposals

in a year)

8. Validity of Inventory Holding Norms From 2006 to 2007.

9. Review of Norms April 2008.

The Inventory holding norms, as suggested above need to be reviewed

(preferable once in three years) for further improvement in the light of the

27

experience that would then have become available.

It is conceded that for groups of items, (specially under 2 spares) which

have necessarily to be imported both the lot quantity inventory and the safety

stocks caused by uncertainties in lead time and consumption during the lead

time would justify a norm nearer to 24 months usage instead of the 18 months

usage as shown above.

MONITORING OF INVENTORY NORMS

On the basis of transaction data showing the inventory status for 7

categories of items for which norms as above have been fixed shall be

generated. Whenever on analysis of such computer reports marked deviation is

found, on inventory holding of particular group(s) of Stores and Spares with

respect to norms, reason there to shall have to be established and recorded in

proper format. Further, corrective actions proposed to be taken for bringing

down the inventory holding to the norms. S&P Department shall further

monitor the progress of implementing the corrective action suggested.

INVENTORY TURNOVER RATIO.

In order to effectively monitor the inventory trends under specified

categories of stores & spares every year (both for planning as well as at the

final stage) as on the beginning/closing of financial year, as the case may be,

the following methodology for computation of inventory Turn-over Ratio shall

be followed:

COMPUTATION OF INVENTORY TURNS OVER RATIO:

AVERAGE INVENTORY = (OPENING BALANCE INVENTORY +

CLOSING BALANCE INVENTORY)/2

INVENTORY TURNOVER RATIO = COST Of GOODS SOLD / AVG. INVENTORY

C.G.S = COST OF PRODUCTION + OPENING FINISHED GOODS –

CLOSING FINISHED GOODS + DEPARTMENT EXPENSES

Mar ' 07 Mar ' 06 Mar ' 05 Mar ' 04

28

Inventory Turnover Ratio 3.83 3.61 8.51 9.81

Fixed Assets Turnover Ratio 0.82 0.86 0.90 0.96

Graphical representation Inventory Turnover Ratio.

Interpretation: the value of these ratios is being decreasing in following years

which indicates about the changing strategies of the company regarding its

Inventory handling and maintaining policies.

INVENTORY CLASSIFICATION

FOR SELECTIVE INVENTORY CONTROL

The single most important objective of S&P Department is to provide a

specified level of service with minimum investment in Inventory, in cement

division the total No. of items run into several tens of thousands. Controlling

receipts and thus regulating the stock of all these items would normally be a

laborious task. Investment on inventory leads to locking up to capital, it is

therefore, more relevant to determine the items or groups of items that merit

comparatively lower levels of concentration from the angle of optimizing on

scarce man hours for effecting controls. Hence materials must be classified

according to their importance for control purposes and greater attention & time

spent on selective basis on the more important items. The “importance” of an

10 9 8 7 6 5 4 3 2 1

Mar ' 04 Mar ' 05 Mar’06

Mar ' 07

29

item can be judge by several criteria such as consumption value, criticality for

continuity of plant operation, market availability etc. Several such parameters

have to be considered in devising a suitable strategy for selective control.

IN JAYPEE FOLLOWING TECHNIQUIES ARE USE FOR

MANAGING THE INVENTORIES :

I.U.C. CLASSIFICATION

All the spares shall be classified into the following three categories based

on the type of utilization foreseen at the time the equipment is initially

acquired.

(i) Insurance (I)

(ii) Unit Assembly (U)

(iii) Consumables (C)

Insurance Spares

Items of spare parts which are not normally required for routine

maintenance but would cause long shut down of vital equipment or entire plant

in case of non-availability when needed for use are termed as Insurance spares.

These items are generally characterized by irregular consumption not easily

susceptible of being closely foreseen, are of high reliability of performance and

high value.

Unit Assembly

As per the Cos. Maintenance policy, certain assemblies/sub-assemblies are

replaced as complete units to release defective assemblies for repair in order to

cut down on costly idle time of equipment. Such sub-assemblies (nominated in

advance under competent sanction) which are to be replaced as complete units

for quick repair of equipment will be classified as unit assemblies.

Consumables

All spares which require replacement due to wear & tear on their inherently

short lift are called “consumables”. These will comprise of:

Fast moving wearing spares.

Slow moving wearing spares

The above classifications i.e. IUC shall be done by Plant Maintenance Head at

30

the stage of ordering initial spares along with equipments in consultation with

operations Head.

ABC ANALYSIS

For identifying an item as A, B or C, the annual value of consumption in

the preceding financial year shall be the basis to start with. Subsequently i.e.

after system capability reaches an adequate 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 importance. The

criteria for declaring an item as X, Y or Z shall be the same as for ABC items

“on stock value consideration basis.” The frequency of generation of reports for

X, Y & Z category items shall be same as that for ABC category. The analysis

shall be based on stocks held at the end of every Financial Year. However, AX

& CX reports based on ABC & XYZ matrix shall also be generated project-

wise once in a year.

ANALYSIS BY CRITICALITY FOR OPERATION (VED)

31

Vital (V) This is the most important item production is very hard to go

without this item.

Essential (E) This item is less important than vital but more than desirable ie this

is booster item.

Desirable (D) Productivity is possible without this item, there will be not much

effect on productivity by replacing this item.

For example: For making cement the most important thing is Lime stone,

Gypsum, Flyash, respectively.

Analysis by Velocity of usage

F(Fast), M(Medium), S(Slow) moving items. The criteria for velocity of

movement to determine grouping FMS differ for spares and other items.

Analysis by market availability

This analysis is carried out on the basis of availability of items in the

market.

S(Scarce), D(Difficult & E(Easy) availability of items in the market.

The various standard categorization / Analysis viz, ICU, VED shall be

carried out item-wise in an agreed time frame to build computer master for

various types of analysis in this regard.

Diagrammatical representation of techniques employed for classification of

inventory.

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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/ELQ. Lead time is sub-divided into the following

components:-

1. Administrative Lead Time

2. Supplier’s Lead Time

3. Transportation Lead Time

Administrative Lead Time

Administrative lead time is an area where stringent control could be

exercised by fixing norms for different modes of tendering and circulating the

same to the indenting departments for realistic planning in raising the material

indents.

Supplier’s Lead Time

This is an area which normally falls in the domain of supplier. It is

therefore, very essential that Purchase Department takes cognizance of this fact

and ascertains / evaluates the time that is to be provided for manufacturers or

stockiest 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 Purchase to

take decisions for getting the material with a lesser transportation lead time to

meet the urgencies of plant operation.

REQUIREMENT SYSTEMS

For effective control of inventory a system of Automatic Procurement for all

‘AP’ items shall be adopted. The following system of Recoupment shall be

followed.-

33

1. Periodical Review System (PRS) – Non AP items.

2. Recoup when due system (WDS) – AP items.

To implement the above two system, Purchase shall lay down the system

applicable to each item and specify the “Limits” as defined in the subsequent

para.

Both the above systems call for determination of the “Limits” to guide

decisions on “when” and “How much” to recoup. These “limits” to guide

decisions on “when” and “How much” to recoup. These “limits” are specified

below together with the principles that should govern their determination.

SAFETY STOCK (SS)

It is the quantity of an item to be added to the bare requirements as worked out,

to cover the incidence of uncertainties in:

(a) Estimation of the lead time for the next supply: Supply lead time is

consider because it required time to reach the next lot.

(b) Estimation of the lead time usage: Usage lead time is consider because

one month before the shutting down next lot is order as it require time to

reach. For example if any machinery is used upto six month than the

next lot should be order before the completion of six month ie in fifth

month.

Company generally consider one month for the ordering of the safety

stock because company generally purchase material from outside market due to

scarcity in local market so, it required time to reach.

Safety stock shall be fixed by HOD- S&P and user for each item/group

of items after VED and ABC analysis based on the one hand and on the costs of

stock out and the levels of assurance (Service) desired on the other.

REORDER LEVEL (ROL)

For the WDS system (i.e. AP Items) ROL = Estimate Lead Time usage + SS.

In the event any demands (Indent / PR etc.) have been kept pending for want of

adequate stocks, with the intimation of issuing from future receipts (such

quantities termed PDI i.e. “Pending demand for Issue) the ROL should be

further enhanced by the PDI. In the PRS system the SS + PDI quantity needs

to be added to the quantity worked out to cover the base requirements upto the

34

commencement of the fixed period. Safety stock takes care of usage during

lead time slippage and deviations in projected usage and these are to be

determined based on past data/experience.

Graphical Representation of Re-order Level

Reordering level is has following three levels they are:

1. Minimum reordering level = reordering level- (normal consumption *

normal lead time)

2. Maximum reordering level = reordering level + reordering quantity-

( minimum Consumption *minimum lead time)

3. Reordering level= maximum consumption * maximum lead time

ECONOMIC ORDER QUANTITY (ELQ OR EOQ)

EOQ/ELQ is defined as the specific quantity of an order (under WDS)

or of a consignment (or lot under PRS) which optimizes the total costs made up

to “Ordering” and “holding” costs. The precise costs for ordering and other

associated costs, i.e. costs for placing an order and for holding stocks (i.e.

Maintenance of Godowns, Cost of Stores Staff, insurance, losses in storage,

obsolescence etc.) applicable.

35

The EOQ/ELQ shall be worked out as follows:

ELQ = 2 A S ½

I C

Where -

C - Delivered Unit cost of material.

A - Annual Consumption Value of item

S - Ordering cost per order

I - Inventory carrying cost expressed as a fraction of the value of

the Inventory.

Or EOQ = 2 S ½ X A ½

I C

Since, ordering cost and inventory carrying cost for particular class of

item [i.e. (i) Gen. Stores, (ii) Spares (iii) POL, Steel, Cement, Fuels) are

constant for any item / group of items as per the table shown above the above

formula could be rewritten as under:

EOQ = K A ½

Where ‘K’ is a constant and ‘A’ is the Annual Consumption Value.

Under the PRS it is necessary to place orders at fixed intervals as may be

acceptable to the supplier(s) and the procurement agency or the Purchase

Department as the case may be to a previously accepted programme. The

recumbent for a period needs to be initiated at least one ROL in advance of the

commencement of the period. The quantity for order would be

(ROL + estimated usage

during the fixed period.

- (Stock + dues + Expected Receipts from

Repair and other sources upto end of the

period.)

By this we come to know that, as the order quantity (Q) increases, the

total ordering costs will decrease while the total carrying cost will increase.

36

It can be seen that the total cost curve reaches its minimum at the point

of intersection between the ordering cost curve and carrying cost curve and

carrying cost line the value of Q corresponding to it will be economic order

quantity Q*.

N.B. ( NOTED BELOW)

Cost of ordering constitutes salary, stationary, postal expenditure, rent

etc. and are to be worked out by respective projects for each mode of tendering.

Cost of holding consists of interest, maintenance material handling, rent,

insurance, safety & security obsolescence etc. and are again to be worked out

by respective projects.

Under the WDs of Recoupment, demand shall be initiated when the

(stock + dues – PDI) fails to be ROL. This could be caused by an issue, or the

cancellation of a due or other contingency. The quantity for recoupment

would be:

ROL + EOQ – (Stock + Dues + Other expected receipts during the next L.T.)

INVENTORY CONTROL OF “AP” (AUTOMATIC PROCUREMENT)

ITEMS

For effective control of inventory trends so as to have optimum

inventory holding periodical review (Daily/monthly/quarterly) of all “AP”

items with particular emphasis on ‘A’ class items shall be carried out.

37

MATERIAL REQUIREMENT PLANNING

Material requirement planning plays a crucial role in arranging

availability of the material at the appropriate time i.e. just when it is required

for actual use and it is therefore, imperative that each Indenting Department

takes cognizance of the real requirement of various users by objectively

studying the past trends of actual consumption jointly with user estimating

future levels of usage in time and quantity as precisely as possible and raises a

Material Indent after determining the reasonableness of quantity and phasing of

usage in time. The indenting agencies shall be held responsible for the

inventory trends in the specified areas. It needs to be emphasised in this

connection that the inventory levels actually attained will tend towards the

optimum in direct proportion to the precision with which future usage in

quantum and in item is estimated. It has been the universal experience that

this aspect does not attract adequate attention at this stage. It needs to be

strongly emphasized that time, effort, inter-departmental debate and

sophistication brought to bear on this aspect more than pays for itself in the

shape of overall performance not only in the Materials function but also in the

O&M area. The requirement panning should take care of the following

parameters namely, item-wise annual consumption in the preceding two to

three years, anticipated requirement for the next one to two years,

anticipated/actual lead times the classification of the items as ABC, VED and

ICU in particular, the overall inventory norms and the method of recoupment

adopted i.e. “Periodical Review” System or “Recoup when due System etc.”

The following broad guidelines shall be followed in respect of the

frequency of procurement of various types of items under the periodic review

system both for construction & Operational requirements.

38

S. No. Class of

items

Placement

of order

Phasing delivery

1 ‘A’

Items

Once in a 6

months

Maximum of 3 months requirement to be

obtained at a time. To be fixed taking into

account inventory norms.

2 ‘B’

Items

Once in a

year

A maximum of 6 months.

3 ‘C’

Items

Once in 2

years

A maximum of one year’s requirement be

obtained at a time. Staggered supply is

recommended to take care of problems

regarding space.

For items under the “Recoup when due” system of recoupment the frequency

of procurement will be determined by the pattern of consumption making

Recoupment due when (Stock + dues - PDI) and falls below ROL

1. For spares in particular the method of ordering should be also guided by the

factors mentioned in the relevant paras on spare parts in the forthcoming

pages.

2. All material indents forwarded to Purchase Department alongwith IIS,

wherein stock held, past consumption, pending dues against pending

Material indent / Purchase requisition waiting to be covered by orders and

Purchase order awaiting compliance with their contract or order ref., last

PO ref. etc.

MIS FOR INVENTORY MANAGEMENT

The overall effectiveness of S&P Department made up by the efficiency

levels reached in its component areas like Purchase, Receipts, Storage, Issue,

Disposal & Inventory Control is reflected through Management reporting

which enables Management to analyse, evaluate and take decisions or remedies

like improvement in the methods of working, amendments to existing policy,

procedure, staffing etc.

It is, therefore, very important that Management at differential levels is

39

apprised at certain frequencies the status on various issues for enhancing the

levels of overall performance.

With the computerization of stores accounting it is possible to achieve

much higher levels of performance and hence computerization of inventory

accounting assumes significant importance from the control point of view.

SPARE PARTS FORECASTING, PLANNING AND BUDGETING.

In a Cement Plant Spare parts account for the major part of not only

maintenance expenses but also working capital. Despite the enormous range

and value of spares inventory, there is often shortage of some critical spare part

or the other which has a crippling effect on Plant availability. This situation is

mainly due to the currently unpredictable nature of failure which creates the

need for effective management of spare parts. Management of spare parts is

thus a complex and far from perfect exercise justifying a constant search for

higher levels of efficiency in predicting future usage and ensuring precision in

arranging receipts as planned and as contracted for.

A systems approach needs to be evolved on “Spare parts forecasting,

planning and budgeting”. The prime objectives of this approach are:-

i) To ensure availability of spares as and when needed so that the

repairs/replacements are made with the minimum disruption in service

and plant availability is not reduced for want of spares and the down

time of the plant due to shortage of spares is eliminated.

ii) To achieve optimum inventory turn-over ratio i.e. out flow/consumption

and physical receipt of spares is so matched with actual physical usage

that the capital blocked up as inventory is reduced to a minimum.

iii) To procure the spare parts of adequate and consistent quality at the

lowest total cycle time & cost.

A sound information system and data base is the first essential for

successfully forecasting the future requirements of spares. Spare parts

forecasting and planning has necessarily to be founded on the maintenance

planning function. Spares are normally required for carrying out:-

a) Planned Preventive Maintenance.

40

b) b) Break down maintenance (Unplanned by its

nature & not amenable to our effective planning).

c) c) Planned Capital repairs / overhaul /

Shutdowns.

The following factors will be considered for identification and computation

of future requirements of spares:-

1. Failure rates – Known or estimated

2. Cost of non-availability Vs. cost of inventory (VED/SDE/ABC

analysis).

3. Population distribution

4. Lead times for normal procurement and “Crash” procurement.

The identification will also consider other factors like:-

1. Operating conditions / environment.

2. Cumulative operating experience with the equipment.

3. Accessibility of the parts in service

4. Stability of design and inter-changeability

5. Throw away or repairable nature of parts/sub-assembly/assemblies.

6. Development potential (in respect of diversification of approved sources

of supply).

Behavioral pattern of equipment is available for a number of years to

pre-plan preventive maintenance and capital repairs/ overhauling. The

requirement of spares needs to be planned at least once in a year for all types of

maintenance i.e. preventive, break down to the extent possible on a statistical &

probabilistic basis and capital repair and overhauling in the following manner.

a) Preventive Maintenance

The objective of Preventive Maintenance is to keep the machine nearest

to the original condition by programmed & periodical check up & maintenance.

The preventive maintenance of various equipments is initially programmed on

the basis of the recommendations of the original equipment suppliers and

modified as per the norms worked out on the basis of the cumulative

experience of Maintenance Engineers. Certain parts are necessarily to be

changed during preventive maintenance considering the wear rate / expected

41

life and the forecast of usage can be made with a relatively high degree of

accuracy. These parts are normally fast moving in nature of accuracy. These

parts are normally fast moving in nature and carry comparatively shorter lead

time. A plan of preventive maintenance will reflect the requirement of these

spares and these can be clubbed for better availability and economic

procurement and stocking. The list of Preventive Maintenance spares shall be

prepared by operation and Maintenance planning Department in consultation

with operation Services Department.

b) Capital Repairs & Overhaul / Shutdowns

During Capital repairs and overhaul many items may be required to be

changed depending upon the condition of spares. The history card of the

equipment if and when rigorously maintained would reflect the failure rates

and outages with causes. These items are of normally longer lead time and

hence a tentative planning for two to three years ahead is required to be carried

out. A firm requirement of spares is worked out on the basis of more firm

capital repair and overhaul schedules. The list of overhauling spares shall be

prepared by site Operation and Maintenance Planning department for each such

overhaul in consultation where considered necessary with Operation Services

Department.

c) Break down Maintenance

It would be difficult to predict the requirement of spares for break-

downs as the pattern of occurrence is uncertain. But the history cards, if

available, give a feed back on life availability. The probable requirement of

spares can be computed by statistical methods but without much accuracy. A

tentative assessment should be worked out annually and included in the total

requirements in part. The exact percentage of the computed forecast that is to

be included will be governed by the factors enumerated in previous para and

the professional judgment of the officials responsible for maintenance. A

history card will be maintained by the Maintenance planning Department and

the same will be reviewed on any yearly basis before taking up the assessment

and forecasting of spare parts for the next year. The requirement of O&M

spares over & above initial spares as identified by OS will be worked out by

42

site O&M department. To identify the list of spares prepared by OS at the

initial stage of project will be taken as a basis for working out further

requirements. The guidelines defined on spare parts management policy, for

initial identification of spares will be taken into account by site O&M

department. The list of spares will be reviewed by site O&M department in

consultation with site Materials Management department on yearly basis. The

list can be made out on package wise basis like turbine, steam generator and

auxiliaries, coal handling plant etc.

For working out the requirement, spares are classified into insurance,

Unit assemblies, consumables spares including wearing parts. These are further

categorized depending upon be consumption value “ABC” and are also

categorized in terms of criticality i.e. vital, essential and desirable. This

categorization will be carried out initially by OS in association with O&M.

All maintenance materials identified subsequently shall also be classified by

OS in consultation with O&M.

PLANNING AND FORCASTING OF SPARES

Planning and forecasting of spares is best done on dates fixed well in

advance (preferably permanently) to facilitate the extremely large degree of

coordination needed between a number of expert functions. Planning for each

item should be covered at least once a year. This compulsion often dictates the

adoption of the PRs rather than the WDS system of recumbent.

While carrying out the above review due emphasis shall be given to

identify the slow moving and non-moving items to have a better control on

inventories. Department should prepare the necessary statement in this regards.

BUDGETING

In order to provision the matching spare parts required for annual

overhaul and regular repair and maintenance of the units, it is desirable that a

careful inter-disciplinary review is made in respect of consumption of spare

parts during the previous year and proper forecast is made for the coming year

to arrive at budget estimates in respect of consumption and procurement.

Operation and maintenance budgets are prepared and dovetailed to the general

and cash flow budget for proper utilization of cash resources. Budgetary

43

control is necessary to control the cost at Commitment stage itself and this is

possible if budget certification is done at the indent stage.

Budget for spares ordered with main equipment (i.e. projects in construction

phase) will be covered in budget along with main equipment. The Budget will

be broken down as under:-

For A Class : Item-wise

For B Class : Equipment-wise

For C Class : Major group-wise

The annual budget of spare parts should be prepared and presented

indicating the spares consumption budget and spares procurement budget.

In line with the costing system, major classification of repair and maintenance

can be represented by following three activities:

(i) Major overhaul / Shut Down Planned

(ii) Preventive Maintenance.

(iii) Break down maintenance

Normally, budgeting will be done for the former two, under each activity

and separate estimates will be prepared for consumption of materials in

physical & financial terms. This estimation will be done at each of the cost

centre level but in the budget proposal, only cost center-wise details are

required to be mentioned.

The above data is compiled through detailed working sheet, identifying

clearly consumption forecast, cash flow requirement for insurance, unit

replacement and consumable items. This exercise should be done by

maintenance planning group in association with site Materials Department and

Finance.

“The Material Consumption, especially of spares, can be estimated

based on the expected life of various components / spares in the installed

equipment, the frequency of break-downs in the past and the requirement of

preventive maintenance and major overhauls”.

“Proper and detailed review of consumption patter followed by analysis, will

go a long way in better understanding of the consumption trends and hence

contribute to the achievement of optimum inventories particularly for insurance

44

and unit replacement assemblies. This exercise will be done by materials

department.

Purchase Budget

“Purchase represent materials to be procured and materials for which

advances are to be paid during the year. This is to be worked out as under:-

Purchase = Closing stock + Consumption – (Opening Stock +

Advance).

The budget reviews covers revised estimates for the current year and

budget estimates for the following years and should be submitted to

management.

STORE MANGEMENT:

The cost of capital blocked in inventory for meeting other future

need/demand is substantial. If this part of working/idle capital is not properly

managed the subsequent losses may be enormous. The success of business

besides other factor depends to a large extent on an efficient storage system.

Material pilferage, deterioration and careless handling may be lead to reduce

profit. The storage management is concerned with carrying right kind of

material in right quantity, neither in excess nor in short supply, providing it

quickly as and when required, keeping it safe against any kind of deterioration,

pilferage or theft and carry out efficient performance of all these function at

lowest possible cost.

Purpose of stores operations:

To have adequate storage stock for satisfying the immediate

service/need of the user.

To reduce the quantities of such stock to the indispensable minimum

which is compatible with the demand in order to diminish the financial

burden of the company.

To proportion request to real stock consumption so that the total amount

of order (being proportional to real consumption) can be for the stores

stock of various sub stores, a sufficiently reliable basis for real ordering

schedule of store procurement, which is necessary for timely demand

meeting.

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Instrument of the system :

Stock Register/ Computerized inventory system.

Following ordering norms for effective inventory control.

Store Receipts and issuance documents.

Benefits of effective store management:

- Avoidance of excess ordering

- Avoidance of excess inventory

- Excellent service to user department

Store function as “Effective and Efficient -Service

Centre ” :

Correct demand forwarding to purchase department for release of order

for right quantity and quality.

Proper store management system should be laid down for effective and

efficient functioning.

Proper inventory control procedure must be followed.

Time to time stock taking to ascertain book stock and physical stock.

Any discrepancy noticed should be immediately corrected for correcting

indent.

ROLE OF STORE :

Developing internal and external customer focus mind set.

Developing process oriented mind set.

Contributing towards value to customer ie.

- Highest Quality

- Excellent service

- Least Cost

- Minimum Lead Time

- Best Relationship

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STORE FUNCTIONS:

Receipt Receiving and accounting of items.

Storage Provision of right and adequate storage and preservation to

ensure that the stock do not suffer from damage, pilferage,

deterioration.

Retrieval Facilitating easy location and retrieval of materials keeping

optimum space utilization.

Issue Fulfilling the demand of customer by proper issue docket.

Records To maintain proper records and update the receipts and issue

of material.

House Keeping Keeping the store clean and in good order so that the

handling, preservation, stocking, receipt and issue can be

done satisfactory.

Control Keeping a vigil on discrepancies, abnormal consumption,

accumulation of stock etc and enforcing control measures.

Surplus

management

Minimization of disposal of scrap, surplus and obsolescence

through proper inventory control and effective disposal of

surplus and obsolete material.

Verification Verifying the computer balances with the physical quantities

and indicating the purchase cycle at appropriate time so as

to avoid out of stock situation.

Control and

coordination

To coordinate and cooperate with the interface.

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How to manage the store ?

There are three major function preformed in stores:-

Receiving of material.

Storage and preservation of stock.

Issuance of stock.

Besides, aforesaid major functions, some other functions are also carried out by

stores:-

- Indent/scrutiny of indent and forwarding to purchase department.

- Record keeping of all transaction.

- House keeping, preventing from spoilage and pilferage.

The following methods for pricing materials issues are general used.

STORES ACCOUNTING:

FIRST IN FIRST OUT: In this method the materials are received first

issued first. The material are issued in chronological order. The recently

received materials remain stock. When ever a requisition for materials issue is

presented to the store keeper he will use the price of the first lot and then of

second and third lot etc. when the quantity of first , second lot is exhausted.

When price are fluctuating then the cost of different batches of production will

be different because issue price of varies lot will be different. This method is

suitable for when price are falling because material issue will be priced at

earlier figure while cost of replacement will be low. On the other hand, when

prices a rising then materials will be issued at lower prices and replacement

cost will be higher. This method is useful for materials which are subject to

obsolescence or deterioration.

LAST IN FIRST OUT: In this method the last received material are issued

first and ending inventory consist of earlier required material. This method is

also known as replacement cost method because the latest purchases goods will

correspondent to the current market price aspect that good were not purchases

much earlier. The inventories will be valued at oldest lots on hand and these

value will be quite different from current invoice price.

Last in first out method is suitable during rises prices because goods will

be issued from the latest received lots at prices which are closely related to

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current market prices. The current cost will also be matched to current income.

This method is able to show lower profits because of increases charge to

production and closing stock figure will also below as they will be valued at

earlier prices. The taxable liabilities will also be low thus enabling the concern

to retain more money in the business.

AVERAGE COST METHOD: In average cost method of pricing all material

in stock are so mixed that a price based on all lots is formed. Average cost may

be two types.

(a) simple average cost.

(b) weighted average cost.

SIMPLE AVERAGE COST: In this method the price of all lots are averaged

and the material are issued on that average price.

WEIGHTED AVERAGE METHOD: In this method the total cost of all the

materials is divided by the total number of items in stock. The prices

calculated in this way will be used for issue of materials upto the time a

fresh purchases has not been made. After a fresh purchases the quantity will

be added to the earlier balance quantity and material cost will be added to the

earlier cost.

A fresh prices is calculated by dividing the changed total cost by the number

of unit in stock after the purchases.

BASE STOCK METHOD: In this method some quantity of materials is

assumed to be necessary for keeping the concern going. The quantity is not

issued unless otherwise there is an emergency. This material which is not

issued as his kept in stock is known as a base stock. The earlier materials

received or kept as a base and are valued at the price on which they were

acquired.

This method is not an independent method. It is used along with some

other methods such as FIFO, LIFO, average price method, etc. after

maintaining a base quantity stock, the issues are price at one of the method

mentioned above. The purpose of this method is to issue material at current

price rate. This aim will be achieved only when LIFO method of pricing the

material is used.

49

STANDARED PRICE METHOD: The issue price material is predetermined

or estimated in this method. The standard price is based on market conditions,

usage rate, handling facilities, storage facilities, etc.

THE BIN CARD: The bin card or the stock card is usually attached to each

bin, self or other form of containers. The bin card of the item stored in the open

yard like coal, are kept at the desk of the store keeper. They are used record of

the quantities of each type of material received, issued and on hand each day.

They contain only the quantity column and they are not consider in the

accounting the price of the material. The prizing is recorded in the store ledger

card (which is discussed in the next paragraph) usually the bin card specifies

the location, the data description of the material, maximum, minimum and

reorder level, date receipt, issue and balance specifying only the quantity etc.

BIN CARD

Bin no. ………………………………. Max. Qty.

…………………….

Material code no. ……………….. Ordering

Level……………….

Store Ledger Folio ………………. Minimum Qty.

………………..

Date Qty. received Qty. Issue Balance Remarks

Bin Card or Stock Card

50

THE STORE LEDGER: The objective of the store ledger is to keep the

proper record of the respective materials specifying their quantity as well as

value. It is a record which charges the respective departments or the job at the

price of the materials issued to them. Generally, stores ledger is maintained on

the losses leaf card basis and separate card kept for each material item. The

store ledger card specifies the account number, location, desc- -ription, of the

materials, unit measurement, maximum, minimum and reorder level, debit,

credit and balance columns under the description of the receipt, issue and the

balance specifying both the quantity and the rupee value.

51

OBJECTIVE OF THE STUDY

1. To know the material management of the company.

2. Financial objective of the company towards inventory.

3. To know the valuation method of inventory.

4. To know what steps are taken by the company to reduce or avoide the

over stocking and under stocking and for this porpose waht

classifciation techniques are used by the company etc.

52

RESEARCH METHODOLOGY

Research methodology is a systematic and scientific method to

know the truth and reality behind phenomena. Research methodology is a

way to systematically solve the problem. When we talk about research

methodology we not only talk about the research methods but we also

consider the logic behind methods we use in the context of our research

study and explain why we use a particular method or technique and why

we are not using others, so that research results are capable of being

evaluated either by the researcher himself or the others.

The aim of research is a process recording and analyzing the

critical and relevant facts about my problem in any branch of human

activity.

According to Hudson, "All progress is born of inquiry. Doubt is

often better than over confidence, for it leads to inquiry and inquiry leads

to inventions."

In this study Descriptive type of research design has been used.

53

COLLECTION OF DATA :

The dealing with the real life problem it is often found that data

collected at the end are inadequate, and hence, it became necessary to

collect data that are appropriate. There are several way to collect the

appropriate data, which differ considerably in context of money cost, time

and other resources of the disposal of other research.

1. Primary Data :-

The data that are the current nature of and are collected from the

Retailer's, Consumers, agents, distributors at the time of survey are colled

as primary data. These data are very important part of data analysis and

interpretation.

During the summer training I collect the primary data. through

interview. Some of the information I got by Dy. G.M. of the company of

(Stores and purchases) , Some of by staff members of store department.

2. Secondary Data :-

Data that are already available i.e. they refer to the data which he

already being collected and analyzed by someone else. It may either be

published data or unpublished data.

During the summer training I collect the secondary data from the

compiler of the company, document of store book keeping, some of the

MIS information I collect from store record.

54

ANALYSIS AND INTERPETATION

GRAPH1:

ABC ANALYSIS

INTERPETATION:

A. Contributes 70% of annual consumption & number of items restricted

around 10%

B. Contributes 20% of annual consumption & number of items restricted

around 20%

C. Contributes 10% of annual consumption & number of items restricted

around 70%

55

GRAPH2:

HOLDING OF THE COST OF RAW MATERIAL IN THE END OF FY IN

CEMENT DIVISION: (ACCORDING TO BALANCE SHEET)

0100200300400500600

2006-07 2005-06 2004-05 2003-04

YEAR 2006-07 2005-06 2004-05 2003-04

RS(IN

LACS)

325 399 500 210

INTERPETATION:

According to the Balance sheet of the year 2005-06 & 2004-05 of the

company closing stock value of raw material in year 2003-04 it is Rs 210Lacs

which increases in 2004-05 upto Rs 500Lacs which falls in 2005-06 upto Rs

399Lacs and in current year (2006-07) it is Rs 325Lacs.

56

GRAPH3:

HOLDING OF THE COST OF FINISHED GOOD IN THE END OF THE FY

CEMENT DIVISION:

0500

10001500200025003000

2006-07 2005-06 2004-05 2003-04

INTERPETATION:

According to the Balance sheet of the years 2005-06 & 2004-05 of the

company closing stock value of finished good in year 2003-04 it is Rs

1800Lacs which increases in 2004-05 upto Rs 2655Lacs which falls in 2005-06

upto Rs 1546Lacs and in current year it is (2006-07)

Rs. 1466Lacs.

YEARS 2006-07 2005-06 2004-05 2003-04

RS(IN LACS) 1466 1546 2655 1800

57

GRAPH4:

HOLDING OF THE COST OF WORK IN PROGRESS THE END OF THE

FY IN CEMENT DIVISION: (ACCORDING TO THE BALANCE SHEET):

0

500

1000

1500

2000

2006-07 2005-06 2004-05 2003-04

INTERPETATION:

According to the Balance sheet of the years 2005-06 & 2004-05 of the

company closing stock value of work in progress in year 2003-04 it is Rs

1606Lacs which deceasing in 2004-05 upto Rs 1373Lacs which again

decreased in 2005-06 upto Rs 770Lacs and in current year ie in 2006-07 it is Rs

634Lacs

YEARS 2006-07 2005-06 2004-05 2003-04

RS(IN LACS) 634 770 1373 1606

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GRAPH5:

HOLDING OF THE COST OF STORES AND SPARE PARTS IN THE END

OF THE FY IN CEMENT DIVISION: (ACCORDING TO THE BALANCE

SHEET):

05000

1000015000200002500030000

2006-07 2005-06 2004-05 2003-04

YEARS 2006-07 2005-06 2004-05 2003-04

RS

(IN LACS)

8993 27544 24477 24194

INTERPETATION:

According to the Balance sheet of the years 2005-06 & 2004-05 of the

company closing stock value of spare parts and stores in year 2003-04 it is Rs

24194Lacs which deceasing in 2004-05 up to Rs 24477Lacs which again

decreased in 2005-06 up to Rs 27544Lacs and in current year i.e. in 2006-07 it

is Rs 8993Lacs.

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GRAPH6:

Company (Jaypee) is thinking to increase the production up to 20% in coming

6 months by starting production in there new setup plants (i.e. SIDHI PLANT

and DALLA CHUNNAR) which will be added in MRP, due to which it will

lead to increase in inventory also. So this graph shows the increase in

production as well as the material required to increase the production.

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90

95

100

105

110

115

120

JUL’08 DEC’08

IN PERCENTAGE

FINDINGS

1. According to the Balance sheet of the year 2005-06 & 2004-05 of the

company closing stock value of raw material in year 2003-04 it is Rs

210Lacs which increases in 2004-05 upto Rs 500Lacs which falls in

2005-06 upto Rs 399Lacs and in current year (2006-07) it is Rs

325Lacs.

2. According to the Balance sheet of the years 2005-06 & 2004-05 of the

company closing stock value of finished good in year 2003-04 it is Rs

1800Lacs which increases in 2004-05 upto Rs 2655Lacs which falls in

2005-06 upto Rs 1546Lacs and in current year it is (2006-07) Rs.

1466Lacs.

3. According to the Balance sheet of the years 2005-06 & 2004-05 of the

company closing stock value of work in progress in year 2003-04 it is

Rs 1606Lacs which deceasing in 2004-05 upto Rs 1373Lacs which

again decreased in 2005-06 upto Rs 770Lacs and in current year ie in

2006-07 it is Rs 634Lacs

4. According to the Balance sheet of the years 2005-06 & 2004-05 of the

company closing stock value of spare parts and stores in year 2003-04 it

is Rs 24194Lacs which deceasing in 2004-05 up to Rs 24477Lacs which

again decreased in 2005-06 up to Rs 27544Lacs and in current year i.e.

in 2006-07 it is Rs 8993Lacs.

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CONCLUSION

In material management the inventory control system of the

company is found satisfactory the company maintained a proper re order

level of the stock to prevent over stocking and under stocking for

controlling purpose the company used all important and effective

techniques of control.

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RECOMMENDATION

1) Implementation of JIT Approach-

Just in time (JIT) approach should be implemented in Jaypee Plant for

inventories other than the vital items, so that the capital blockage can be

reduced, at present the traditional approach is being used i.e. procurement

of inventory for just in case (JIC), it is required. The JIT approach seeks to

eliminate all sources of waste, in production activities, by providing the

right part, at the right place, at the right time.

Benefits:

The JIT system results in much less Inventory lower costs & better

quality than the JIC approach.

The JIT approach will also reduce the risk of holding the inventory

like Risk of deflation, Risk of obsolescence, Risk of deterioration etc.

The JIT approach also reduces the Reorder, storage & carrying cost

of inventory.

2) Elimination of lead time-

JAL require some time to process the order and some time is also required

by the supplying firm to give supplies of raw material etc. This lead time on

average basis is 15 days. In every inventory this lead time should be

eliminated for better and fast production. As the lead time increases the cash

conversion period, and hence affects the working capital of the firm. So for

reducing the period of cash conversion cycle, the elimination of the lead

time could play an important role.

Benefits:

It will reduce the cash conversion period.

It will help in improving the efficiency of the firm.

3) Employees should be given more facilities, so that they feel comfortable

in the working environment. Like good food, AC etc facilities.

4) There should be any kind of entertainment (club facilities etc) in the

organization for the employees to overcome their stress of work.

63

LIMITATION

Although the area, which I have taken for study, was too vast for me to

handle but I have tried to justify each and every aspect to the best of my

abilities. During the course of making the project, I found difficulty in getting

the relevant data for study, although I tried hard to gather it so some of the data

is not very up to the mark.

- The sources of data collection are different so the errors of omissions

may present on account of different methodology followed by the

sources considered for data collection.

- Historical data is being used for study; in case of predicted one there

is no guarantee.

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BIBLIOGRAPHY

BOOKS :

(1) Pandey,I.M.: ‘Financial Management’Vikas Publishing House ,New

Delhi.

(2) Financial management of R.K. Sharma.

(3) Cost accounting

(4) Compiler of the company or documents of the company.

WEBSITES:

www.google.co.in

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