INDEX

Name of the topic Page no.

EXECUTIVE SUMMARY 1-2

STATEMENT OF THE PROBLEM 3

OBJECTIVES AND LIMITATIONS OF THE STUDY 4-5

RESEARCH METHODOLOGY 6

INTRODUCTION TO IOCL 7

INDIAN OIL CORPORATION LTD. 8-21 SWOT ANALYSIS 22-24

IOCL, BARAUNI 25-31

PURCHASE PROCEDURE 32-43

INVENTORY MANAGEMENT 44

MATERIAL MANAGEMENT (ABC Analysis) 45-51 IMPORTANT CONCEPTS IN INVENTORY MGT.

(JIT, Kanban, EOQ, ROP, Safety stock etc.) 52-63

OIL MANAGEMENT 64-83

CONCLUSION 84

SUGGESTIONS 85

BIBLIOGRAPHY 86

EXECUTIVE SUMMARY Inventory management is vital in an oil plant. This project “ INVENTORY MANAGEMENT ” has been completed in INDIAN OIL CORPORATION LIMITED, BARAUNI. It deals with proper purchase operation, handling of materials and oil management processes. Purchase procedures play a very important part in inventory management. Cost reduction measures can be

taken right from the purchase process. Various methods involved in purchase procedures have been studied. Thousands of spares and parts are

stored by material management department. Their proper upkeep and maintenance are important for the refinery. Here the materials are classified

on the basis of ABC analysis based on monetary values. This method is applied because materials are quite large. They are more than 30,000 in number. Other basic concepts of inventory have also been studied and

explained. The project is also related to oil management in the last chapter. Efficient purchase of crude oil and proper management of finished products

can add to the profitability of the company. The company maintains the storage of several finished products for further distribution.

The Corporation's cross-country network of crude oil and product pipelines, spanning more than 10,000 kms and the largest in the country, meets the

vital energy needs of the consumers in an efficient, economical and environment-friendly manner. Indian Oil is investing Rs. 43,393 crore (US $10.8 billion) during the period 2007-12 in augmentation of refining and

pipeline capacities, expansion of marketing infrastructure and product quality upgradation as well as in integration and diversification projects. In

financial parlance, Inventory is defined as the sum of the value of raw materials, fuels & lubricants, spare parts maintenance consumables, semi

processed materials and finished goods at any given point of time. Operational definition of Inventory would be: "The amount required raw

materials, fuels, lubricants, spare parts and semi-processed material, stocked for smooth running of the plant". Since these resources are idle when kept in

stores, inventory is defined as an idle resource of any kind having an economic value. The main reasons for holding inventory are:-

To maintain targeted flow of production in line with national demand.Protection against uncertainties of demand & supply which can not be

predicted with sufficient accuracy.To avoid stock out in the period of shortagesIn periods of rapid price rise, higher inventory levels .

1

STATEMENT OF THE PROBLEM

Inventory management is a core function of a production company. It is an important area in the day to day management of the firm. Inventory management is the functional area of the finance that covers the efficiency of the production of a manufacturing firm. It deals with the proper storage of materials and products. A suitable inventory management applying various cost cutting measures leads to overall cost reduction of the company. This project covers the purchase procedures, material inventory and oil management in IOCL, Barauni. Here materials are managed mainly on the basis of ABC analysis. But, other concepts have also been studied and dealt with. Oil products and oil management have also been studied. A proper inventory management is a boon for a manufacturing company like IOCL, the biggest oil company in India.

2

OBJECTIVES OF THE STUDY

1. To study the purchase procedures of materials.2. To study and classify various spares and materials in the

store department (ABC analysis).3. To analyse and understand the methods involved in the

inventory of materials.4. Also to study related concepts in inventory management.5. To study and explain EOQ, ROP, WIP, JIT etc. 6. To go through procurement and accounting procedures of

crude oil.7. To study several oil products in the refinery.8. Proper inventory management leads to cost reduction

LIMITATIONS OF THE STUDY

1. The study is confined to IOCL, Barauni.2. All the information could not be made public by the

organization due to confidentiality.3. Secondary data used in inventory management.4. Report is based on the information made available by the

company, consultation with guides and self studies (internet and books).

5. The report is related to materials and oil inventory management. It may not be not be applicable to other kind of inventories like clothes, books etc. where a few raw materials are required.

3

RESEARCH METHODOLOGY

Intensive research has been done during this project to find out the necessary information regarding both purchase and inventory activities carried out in Barauni Refinery and the various projects that are being implemented to optimize profit and product yield. While working in the organization, I got much of the information during the practical work. The methodology applied to gather the necessary information is discussed as follows. The project is related to purchase procedures and various methods involved in inventory and oil management. There is very less or no scope of primary data in this project. The project is basically based on secondary data made available by the company and other sources for more information.

I collected information dealing with inventory management from materials department. Purchase & sales and production data were obtained from the finance department. These data and information were studied and analyzed properly to present the report in this form.

During the internship period, I went through Material Management Manual, Oil Management Manual, Brochures, Financial Appraisal and Annual Operation Report provided by IOCL, Barauni. Documents, books and last but not the least websites were also referred to get enough information for the completion of the project.

4

INTRODUCTIONTO IOCL

INDIAN OIL CORPORATION LIMITED

5

Indian Oil Corporation Limited (Indian Oil) is the country's largest

commercial enterprise, with a sales turnover of Rs.1, 50,677 crores

and profits of Rs.4,891crores for fiscal 2004.

Indian Oil is India’s No.1 Company in Fortune's prestigious listing of

the world's 500 largest corporations, ranked 189 for the year 2004

based on fiscal 2003 performance. It is also the 19th largest

petroleum company in the world. The company has also been

adjudged No.1 in petroleum trading among the national oil

companies in the Asia-Pacific region.

Indian Refineries Ltd. was formed in 1958 with Mr Feroze Gandhi as

Chairman.

Indian Oil Company Ltd. was established on 30th June 1959 with Mr

S. Nijalingappa as the first Chairman.

Beginning in 1959 as Indian Oil Company Ltd., Indian Oil Corporation Ltd.

was formed in 1964 with the merger of Indian Refineries Ltd. (Estd. 1958).

As India's flagship national oil company, Indian Oil accounts for

56% petroleum products market share among PSU companies, 42%

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Indian refinery ltd.

Refining company

Incorporated

Indian Oil CompanyMarketing company

Incorporated

Merger

Indian Oil Corporation

national refining capacity and 69% downstream pipeline throughput

capacity.

Indian Oil controls 10 of India's 18

refineries - at Digboi, Guwahati,

Barauni, Koyali, Haldia, Mathura,

Panipat, Chennai, Narimanam and

Bongaigaon - with a current combined

rated capacity of 54.20 million metric

tonnes per annum (MMTPA) or one

million barrels per day (bpd).

< IndianOil accounts for 42% of

India's total refining capacity .

Subsidiary companies of IOCL

Indian Oil Blending Ltd.

Indian Oil Mauritius Ltd.

Lanka IOC (P.) Ltd.

Chennai Petroleum Corporation Ltd.

Bongaigaon Refinery and Petrochemicals Ltd.

IBP Co. Limited

Vision of the Corporation

A major diversified, transnational, integrated

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energy Company, with national leadership and a strong environment conscience, playing a national role in oil security& public distribution.

Mission of the Corporation

To achieve international standards of excellence in all aspects of energy and diversified business with focus on customer delight through value of products and services, and cost reduction.

  To maximise creation of wealth, value and satisfaction for the

stakeholders.

To attain leadership in developing, adopting and assimilating state-of- the-art technology for competitive advantage.

To provide technology and services through sustained Research and Development.

To foster a culture of participation and innovation for employee growth and contribution.

To cultivate high standards of business ethics and Total Quality Management for a strong corporate identity and brand equity.

To help enrich the quality of life of the community and preserve ecological balance and heritage through a strong environment.

OBJECTIVES OF THE CORPORATION

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To serve the national interests in the oil and related sectors in

accordance and consistent with Government policies.

To ensure and maintain continuous and smooth supplies of

petroleum products by way of crude refining, transportation and

marketing activities and to provide appropriate assistance to the

consumer to conserve and use petroleum products efficiently.

To earn a reasonable rate of interest on investment.

To work towards the achievement of self-sufficiency in the field

of oil refining by setting up adequate capacity and to build up

expertise in laying of crude and petroleum product pipelines.

To create a strong research and development base in the field of

oil refining and stimulate the development of new product

formulations with a view to minimise/eliminate their imports and

to have next generation products.

To maximise utilisation of the existing facilities in order to

improve efficiency and increase productivity.

To optimise utilisation of its refining capacity and maximise

distillate yield from refining of crude to minimise foreign

exchange outgo.

To minimise fuel consumption in refineries and stock losses in

marketing operations to effect energy conservation.

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To further enhance distribution network for providing assured

service to customers throughout the country through expansion of

reseller network as per Marketing Plan/Government approval.

To avail of all viable opportunities, both national and global,

arising out of the liberalisation policies being pursued by the

Government of India.

To achieve higher growth through integration, mergers,

acquisitions and diversification by harnessing new business

opportunities like petrochemicals, power, lube business,

consultancy abroad and exploration & production.

OBLIGATIONS

Towards customers and dealers

To provide prompt, courteous and efficient service and quality

products at fair and reasonable prices.

Towards suppliers

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To ensure prompt dealings with integrity, impartiality and

courtesy and promote ancillary industries.

Towards employees

Develop their capability and advancement through appropriate

training and career planning.

Expeditious redressal of grievances.

Fair dealings with recognised representatives of employees in

pursuance of healthy trade union practice and sound personnel

policies.

Towards community

To develop techno-economically viable and environment-

friendly products for the benefit of the people.

To encourage progressive indigenous manufacture of products

and materials so as to substitute imports.

To ensure safety in operations and highest standards of

environment protection in its manufacturing plants and

townships by taking suitable and effective measures.

Towards Defence Services

To maintain adequate supplies to Defence Services during normal

and emergency situations as per their requirement at different

locations.

11

Five Divisions of Indian Oil corporation limited

Refineries division

Pipelines division

Marketing division

Assam oil division

Research and development centre

Units under refineries division

REFINERIES YEAR OF COMMENCEMENT

Guwahati 1962

Barauni 1964

Gujarat 1965

Haldia 1975

Mathura 1982

Panipat 1998

Besides the above 6 refineries, Digboi refinery in Assam oil division, a

private sector oil company which was nationalised and merged with Indian

oil corporation limited in the year 1981.

12

13

Organogram of divisions of IOCL

Organogram of Finance Department (Refineries)

14

SWOT ANALYSIS

HIGH FOREIGN EXCHANGE DEBT.

IOCL has managed to significantly cut its borrowing cost due to high share

of foreign exchange debt. Its share of foreign exchange borrowings is

increasing with foreign exchange loans crossing 50% of its total debt

compared to 42% at the end of the last financial year.

HIGHEST MARKET SHARE

As India's flagship national oil company, Indian Oil accounts for 56%

petroleum products market share, 42% national refining capacity and 67%

downstream pipeline throughput capacity

EXPERTISE IN OIL & GAS INDUSTRY

Indian Oil is one of the leaders in providing engineering, construction and

consultancy services to the pipeline industry. Highly qualified professionals

with vast experience execute pipeline projects from concept to

commissioning and provide services for construction supervision and project

management.

FOREIGN SUBSIDIARIES AND JOINT VENTURES

Indian Oil is strengthening its existing overseas marketing ventures and

simultaneously scouting new opportunities for marketing and export of

petroleum products in foreign markets. Two wholly owned subsidiaries are

already operational in Sri Lanka and Mauritius, and regional offices at Dubai

and Kuala Lumpur are coordinating expansion of business activities in

Middle East and South East Asia regions. The Corporation has launched

eleven joint ventures (listed separately) in partnership with some of the mostrespected corporate from India and abroad. 

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WEAKNESSES

STRINGENT CORPORATE POLICIES

The decisions relating to administration are taken at the corporate level.

Even minor proposals are to be referred to the top management. This leads

to a delay in decision-making.

LACK OF MARKETING EFFORTS

Among the public sector oil companies, Indian Oil Corporation is the only

one to follow a weak marketing strategy. It in only in the recent years that

the company has started to market its products. However, still the efforts

seem to be weak when compared with the competitors like BPCL and HPCL

PROMOTION POLICY

Most of the public sector companies seem to suffer from these lacunae. The

employees are promoted mainly on the basis of experience and not on the

efforts and initiatives displayed by the employee in his work. This results in

de motivation and lack of interest for their work on the part of the

hardworking employees, who then tend to shift jobs to satisfy their need for

self-esteem.

TENDER PROCESS

The policy of selection of the lowest bidder tends to affect the quality of the

products/services on some occasions. A more simplistic procedure is also

likely to generate some savings for the company, since tendering process

leads to expenses on account of advertisement.

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OPPORTUNITIES

Exploration and Production

Indian Oil is metamorphosing from a pure sectoral company with dominance

in downstream in India to a vertically integrated, transnational energy

behemoth. The Corporation is making investments in E&P and

import/marketing ventures for oil and gas in India and abroad, and is

implementing a master plan to emerge as a major player in petrochemicals

by integrating its core refining business with petrochemical activities.

THREATS

Entry of Big Private players

The opening up of the oil sector for private players poses a threat even for this well established company. With Indian players like Reliance and Essar and foreign player like Shell planning their entry into the Indian scenario, the road seems to be tough for Indian Oil.

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IOCL, BARAUNI

Barauni Refinery was built in collaboration with Russia and Romania. Situated 125 kilometres from Patna, it was built with an initial cost of Rs 49.40 crore. Barauni Refinery was commissioned in 1964 with a refining capacity of 1 Million Metric Tonnes per Annum (MMTPA) and it was dedicated to the Nation by the then Union Minister for Petroleum, Prof. Humayun Kabir in January 1965. After de-bottlenecking, revamping and expansion project, its capacity today is 6 MMTPA. Matching secondary processing facilities such Resid Fluidised Catalytic Cracker (RFCC), Diesel Hydrotreating (DHDT), Sulphur Recovery Unit (SRU) have been added. Theses state of the art eco-friendly technologies have enabled the refinery to produce environment- friendly green fuels complying with international standards. Barauni Refinery was initially designed to process low sulphur crude oil (sweet crude) of Assam. After establishment of other refineries in the Northeast, Assam crude is unavailable for Barauni . Hence, sweet crude is being sourced from African, South East Asian and Middle East countries like Nigeria, Iraq & Malaysia. The crude is brought up to Haldia by Very Large Crude Carriers (VLCCs) from where it is pumped through pipeline to Barauni. With various revamps and expansion project at Barauni Refinery, capability for processing high -sulphur crude has been added high-sulphur crude oil (sour crude) is cheaper than low sulphur crudes thereby increasing not only the capacity but also the profitability of the refinery.Barauni Refinery has an elaborate Safety Management System. Refinery is following stringent Oil Industry Safety Directorate (OISD) standards and other Rules/ Acts as applicable. Periodic Safety Audit of the facilities and system is carried out. Each recommendation’s status is thoroughly discussed in the monthly Health & Safety Committee Meeting chaired by the top most official of the company. No efforts are spared to fulfill recommendations arising during Safety Audit, in shortest possible time.

The crude oil for Barauni refinery was initially sourced exclusively from oil fields of Assam through Oil India Pipeline. But due to utilization of available crude in North-East itself after commissioning of Numaligarh Refineries, Barauni Refinery has been fully sourced by imported crude from 2001-2002. To make this feasible, a new Pipeline namely Haldia Barauni Crude Pipeline (HBCPL) was constructed and for economic viability of

18

fresh investment the old refinery management has roughly invested Rs. 2000 cr. in expanding the refinery to 6 MMTPA in2002-2003. The crude movement take place in very large crude carriers (VLCC) up to the Bay of Bengal but due to the poor sea condition can’t reach Haldia port directly. This necessitates transhipment of crude in high sea to smaller vessels which in turn bring the crude up to the port where it is unloaded in custom bonded tanks before being pumped through HBCPL. This particular movement of transhipment involves additional costs in the nature of

1. Freight of daughter vessels

2. Demurrage of VLCC

3. Additional wharfage

To this additional cost is putting Barauni Refinery into a sort of disadvantage in comparison to other west coast Refineries. Considering the scene management is implementing a new pipeline project to connect HBCPL with Paradip port to which place VLCC’s will be directly wharfed and above additional expenditures can be avoided. There is another additional expenditure which is specific to Barauni Refinery and doesn’t apply to many Refineries of India is “Entry Tax”. This has been contested by the management in the Court of Law on Constitutional grounds and stay off 50% has been obtained from High Court, decision of which is pending in Supreme Court.

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BARAUNI REFINERY FINANCE DEPARTMENT ORGANOGRAM 2009

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Functions of the Finance Department

Management of financial resources for meeting the corporation’s

programmes of operations and capital expenditure including

investment of surplus fund, if any.

Ensuring uniform financial and accounting policies and

procedures, to the extent possible, in the division.

Establish and maintain a system of financial scrutiny and internal

checks and render advice on financial matter including

examination of feasibility studies and detailed projects reports.

Establishment and maintain an appropriate system of budgetary

control and management information system for different levels of

the management.

Carry out periodical/special studies with a view to control costs,

reduce expenditure, economy in administrative expenditure,

improve efficiency to maximise profitability of the corporation.

Maintain the financial accounts, cost accounts and other relevant

books and records in accordance with the various statutory and

other requirements.

Advise on corporate cash planning, credit policy and pricing

policies of the corporation.

Ensuring that the corporation acts in all financial and accounting

matters as per approved policies of the corporation within the

framework of government policy for public enterprises.

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FINANCE DEPARTMENT’S MISSIONS

To provide high quality financial staff support for decision-making and control to all levels of management – corporate, divisional, unit and location to enable the achievement of overall corporate objectives and goals.

To play a lead role in scanning the domestic and international financial environment, the formulation and implementation of all financial policies and plans for different time spans consistent with and conducive to the business plans for expansion, diversification, productivity etc.

To interact pro-actively with the relevant Government agencies on pricing and investment and with financial institutions, depositors and creditors, with sensitivity and promptness, for mobilization and provision of funds for uninterrupted operations and project execution at optimal costs.

To maintain, review and update all relevant accounting records, systems and procedures for discharging the fiduciary responsibilities and enabling compliance with statutory obligations.

To inculcate financial awareness, cost benefit attitudes and system orientation in the entire organization.

To develop the human resources, systems and techniques of finance for continuing innovation and contribution towards IOC corporate excellence

22

FINANCE DEPARTMENT’S OBJECTIVES 

To ensure adequate return on capital employed and maintain a reasonable annual dividend on its equity capital.

To ensure maximum economy in expenditure.

To generate sufficient internal resources for financing partly / wholly expenditure on new capital projects.

To develop long term corporate plans to provide adequate growth of the activities of the Corporation.

To continue to make an effort in bringing reduction in the cost of production of petroleum products by means of systematic cost control measures.

The endeavor to complete all plans projects within stipulated time and within stipulated cost estimates.

Financial Goals

To inculcate cost consciousness in user departments.

Development of standard refinery costs at each unit level.

Proper implementation of budgetary control and submission of

MIS in time.

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To keep the level of inventories below the level fixed by the board

and outstanding debts, loans & advances and claims at bare

minimum.

Ensure payment on due date to various agencies.

Monitor capital expenditure to ensure completion within stipulated

time and cost.

Optimise utilisation of working capital.

Efficient management of funds.

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PURCHASEPROCEDURE

25

Purchase procedure

Purchase Function , as we know the important function in all type of

organizations. Without purchase of materials which are required for

producing goods, organization is not able to meet the demands of

goods. The material in the IOCL is divided into parts i.e.

hydrocarbon & non-hydrocarbon. The hydrocarbon like crude

products etc & non-hydrocarbon like furniture, tools, machinery,

pipes etc.The transactions relating to the procurement of materials

from the indenting stage to the payment stage have been divided in

various parts whereby each part of the work is handled by an

independent agency till the transactions is completely closed. The

division of work between various agencies operates as a system of

internal check and is a vital part of the system as a whole. The

procedure is as follows:-

1). In planning of the purchasing of the materials, an annual

purchase budget plays an important role.

2). Budget estimate for next year and revised budget for current

financial year is required to be made by each unit and have to be

submitted to the head quarter by September in prescribed

Performa. Quarterly monitoring of the purchase budget to be

done at the unit level and the performance report has to be sent to

the head office. In respect of the inventory control items there

should be strictly controlled with reference to amount provided

in the budgets. As the items under inventory control are

voluminous, initial control may be in respect of A and B class

items.

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3). INDENTING

Inventory control items: -

For all repetitive items of stores the responsibility of

raising purchase indents, procurement, stocking and

supply to the consuming departments is entirely with the

material department.

Re – order (ROL) to be constantly reviewed considering the

procurement lead time while raising purchase indents in order

to minimize the inventory levels.

Indents to be approved by the competent authority as per

delegation of powers.

To determine ROL for repetitive nature of items, the

following formula may be adopted, wherever applicable:-

R = CA (L-3) + Cmax

Where R = ROL

CA = average monthly consumption in last three years

Cmax = Maximum consumption in any quarter.

L = Lead time in months.

For each category of items, indent shall be prepared in SAP after

due approval of the competent authority, may be sent to the

purchase section. The third copy will be retained by inventory

control section for record.

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Non-inventory control items:-

Purchase indent shall be raised by user department in SAP.

Indents for hospital requirement including medicines shall

be raised by the medical department.

Indents for vehicles, office equipment, stationery and

printing, furniture, uniforms, canteen/welfare requirements

shall be raised by the administration departments.

Spare parts, piping material and consumable items etc. are

required for one time consumption and which are not

covered by the inventory control section shall be indented

by technical service department. After conducting necessary

probabilistic survey relating to replacement need of

individual plant.

4). Preparation of indents

Indents shall be prepared separately for each category of stores

in triplicate.

Indents pertaining to additional facilities and project materials

against approved capital budget and spare parts, piping material,

consumables store etc. sought to be procured under revenue

budget, and shall be routed through inventory control section

who shall indicate present stock, pending orders, if any, as well

as availability of surplus materials at our various units either of

the same specification or alternate material of higher grade

against each of the items intended.

Wherever the material is not available from the surplus stock or

alternative specification from the existing stock, a certificate

from the material manager is to be obtained as under:-

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“The items intended are not available either from the regular

stock or surplus list of all our units.”

Indents should be completed in all respects and shall necessarily

include the information of previous source of supply (if known)

and the rate and purchase order reference against which the

supply was received earlier.

5). Approving of indents

The indent can be approved by the following authority according

to the financial limits prescribed as per delegation of powers.

If indent of Rs. 50000, head of department will approve the

indent.

If the indent is up to Rs. 500000, DGM (Deputy General

Manager) will approve the indent.

If indent is above Rs.500000, unit head is responsible to

approve it.

In case of emergency requirements the indents will be approved

by GM/ED.

6). Registration of indents

Indents are registered in SAP and indent is created.

7). Finance concurrence

No financial concurrence shall be required for indents against

approved budget for A.F. (additional facilities).

No finance concurrence is necessary in respect of purchase

proposals for the following:

29

a) Purchase up to Rs. 25000/- from the lowest tenderer and up to

Rs. 2000/- from other than the lowest.

b) One repeat order within the prescribed limits at one time

and value up to Rs. 25000/-.

c) Purchase for proprietary items or DGS&D rate contract price

unless the value of the proposed individual order exceeds

Rs. 25000/-.

All other purchase proposals up to Rs. 50000/- shall be

scrutinized and concurred by the finance department. Proposal

above Rs. 50000/- shall be reserved for consideration of the

tender committee.

8). Tendering and acceptance of bid

After checking of approved indents by the concerned functional

head of purchase department, tenders are called except for

canalized or control commodities like cement, sulphur, steel etc.

Generally the procurement of material shall be made by any of

the following modes of tendering:

Open tenders

Global open tenders

Press tenders

Limited tenders

Single tenders

Open tenders

These shall be invited through the press advertisement by short

tender notification in English and local newspaper approved by

30

the personnel relation department for high value items of

equipment and materials valuing more than Rs. 1000000.

However, approval of head of material department is to be

obtained before issuing press notification.

For items of regular consumption nature where source of supply

have already been established and where list of approved vendors

is maintained and duly updated from time to time, press tenders

need not be invited for such items valuing more than Rs.

1000000. However, approval of GM/ED shall be taken for wavier

of issuing press tenders in such cases.

Limited tenders

To ensure that the procurement of material of proper quality from

reliable and competent manufacturer is done, a list of selected

vendors shall be maintained for each category of equipment and

material by each unit. Limited tenders enquiries up to the value

of Rs. 100000 should be sent by under certificate of posting and

above Rs. 100000 by registered post only. This was the earlier

used method. Now however, all the enquiries should be sent by

courier only. Issue of enquiries by hand is avoided unless the

procurement is critical. Such enquiries issued by hand should

have prior approval of CMTM.

Single tenders

Normally no procurement is done on single tender basis

except in the following circumstances:

Where the item has been identified and approved by the GM

that the nature of the item is proprietary of single

31

manufacturer and no other substitute material is acceptable

for technical reasons such as spare parts, chemicals, special

tools etc.

In very exceptional cases, although there may be alternate

source of supply but they are not acceptable due to certain

specific reasons to be recorded with full justification and

approval of GM obtained for the same, it will be permissible

to float single tender enquiry.

Cash purchases within the limit as prescribed from time to

time is permissible on single tender basis subject to

ascertaining reasonability of price at a level of deputy

manager and above.

9). Methods of procurement of materials

Besides the above modes of tendering, the following methods of

procurement of materials for expeditious supply and to reduce

procurement lead time are followed:-

Repeat orders

Cash purchases

Emergency purchases

DGS&D rate/running contract

Repeat Orders

Where the same item has to be purchased identical in all

respects, a repeat order may be placed with the approval of the

competent authority provided the following conditions are

satisfied:

That the original order against which repeat order is being

considered was not placed earlier than six months.

32

That the quantity proposed to be purchased is less than or

equal to the quantity originally ordered.

That there has been no reduction in the market rates of similar

market ever since the original ordered was placed.

That the order was placed as a result of regular tender enquiry

and the order was placed on technically lowest basis.

One repeat order up to the value of Rs. 25000/- against order

would not require any financial concurrence. However any

subsequent repeat orders within the above conditions shall be

placed with financial concurrence only.

Cash purchase

For item of value below Rs.1000 in each case, a regular enquiry

is not necessary and such item can be procured on cash basis

from the open market. However the purchase officer shall ensure

that the items are being purchased at competitive prices

prevailing in the market.

The cash purchase should be authorized by CMTM/SMTM.

The items should be purchased preferably from government

owned stores.

Emergency purchase

Emergency purchases are permissible only in unforeseen

circumstances. In all cases of emergency purchases, the reason

for such emergency shall be recorded in writing and the

procedure to be followed as under:-

The indents should be prepared by the HOD and forwarded to

CMTM/SMTM after being approved by GM/ED.

In case of items costing Rs. 10000or less, an officer from

material department along with the representative of user

33

department shall be deputed to collect quotation by hand from

minimum of three firms. A decision on the offers so collected

may be taken on the spot and delivery obtained immediately.

In case of items costing between 10000 to 50000 the head of the

material department would constitute a committee of

DMTM/MTM and an officer each from accounts department and

the user department at appropriate level, with authority to visit

the nearest market and to collect minimum of three quotations.

The committee so constituted is empowered to take decision on

the spot.

In case of items costing more than 50000, a committee consisting

of representative from accounts, material and user department

would be constituted by GM/ED and the committee would follow

the same procedure.

Purchase against DGS&D rate/running contract

Where the item is to be purchased under running contract

concluded by Directorate General of Supply and Disposal,

purchase of such item should be based on DGS & DRS prices

only directly from vendors. This mode of purchasing eliminates

calling of tenders, saving of time and give advantage of most

competitive price resulting in saving of avoidable extra

payments.

For obtaining the copies of the rate contract, regional officers in

Mumbai/Chennai/Calcutta or directorate of DGS & D at New

Delhi may be contracted by the various units of R&P divisions.

10). Preparation of Tender DocumentsIn order to facilitate all divisions to follow uniform mode of

tendering, the following system may be followed on the basis-

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A) Single bid system procedure:-

Notice inviting tenders

Format of notice inviting opened tenders is attached at annexure-

Tender documents

1) Table of contents (total no. of pages in each section shall

be indicated).

2) Issue of letter of tender documents (name of party to

whom it is issued, price of documents etc. shall be

indicated).

3) Notice inviting tenders (copy of NIT as issued to press or on

the website).

4) General instructions to the tenderer.

5) General condition of the contract.

6) Special condition of the contract.

7) Technical specification and price part.

8) Time schedule for execution

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B) Two bid system:-

In case of all other purchases where foreign exchange is involved

and/or where value of purchase is estimated to Rs. 50 lakhs or

more, two-bid system of tendering shall be followed.

Two bid system procedure:-

Notice inviting tenders

In two-bid system, there is no other format for inviting tenders

only ANNEXURE-A is attached along with the single-bid format

which includes number of enquiry documents.

Tender document

A set of documents for two bid system should consist of all

papers as attached to single bid system. However complete

instruction shall be given under special condition of tender about

the manner of submission of tender of two bid system which

should be as follows:-

Part 1-technical and commercial part

Part 2-price part

Tender document part 2 containing the prices should not be

opened until evaluation of technical and commercial part is

completed.

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INVENTORY MANAGEMENT

37

MATERIAL MANAGEMENT

INVENTORY CONTROL PROCEDURES FOR STORES, SPARES & CHEMICALS (Ref. Material Management Manual, IOCL)

1. Introduction

Materials, fuels & lubricants, spare parts maintenance consumables, semi processed materials and finished goods at any given point of time. In financial parlance, Inventory is defined as the sum of the value of rawOperational definition of Inventory would be: "The amount of required raw materials, fuels, lubricants, spare parts and semi-processed material, stocked for smooth running of the plant". Since these resources are idle when kept in stores, inventory is defined as an idle resource of any kind having an economic value.

2. Reasons for holding Inventory

The main reasons for holding inventory are:-To maintain targeted flow of production in line with national demand.Protection against uncertainties of demand & supply which can not bepredicted with sufficient accuracy.To avoid stock out in the period of shortagesIn periods of rapid price rise, higher inventory levels may well have to beaccepted.Long Delivery periodIn a nut shell, Inventory control, therefore deals with determination ofoptimal procedure for maintaining stocks to ensure continued availability of required material but avoids storage of excessive and obsolete stocks.

3. Selective Inventory Control Techniques

3.1 ABC Analysis Inventory management becomes very difficult if there are a large number of items to be stocked e.g. in case of IOCL where each refinery is having a stock of more than 30,000 items. ABC is basic analytical management tool which enables the management to exercise selective control and place the efforts where the results would be greatest.

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ABC classification shall be based on their annual consumption as given:-

A: Rs 5 lacs and aboveB: Rs 1 lac to Rs. 5 lacsC: less than Rs 1 lac

3.2 In order to achieve selective control, the various items are first classified as A or B or C class items. The classification is done by taking into account the annual consumption value of each item. These values are usually obtained by looking into last years consumption value of the items in inventory. The steps involved in classifying items as A or B or C category are as follows:-(i) Calculate annual issues (in Rs.) for each item in inventory by multiplying the unit cost of the item by the number of units issued in a year.(ii) Sort all items by rupee annual issues in descending sequence(iii) Prepare a list from the ranked items showing item no., unit cost, annual units issued and annual rupee value of units issued.(iv) Starting at the top of the list, compute a running total item-by-item issue value and the rupees consumption value.(vi) Compute and list for each item the cumulative percentage for the item count and cumulative annual issues value.(vii) Classify the top 10-15 percent of the items as "A" items while the bottom 60 to 70 percent of the items are classified as "C" items. However, the `balance items between these 2 limits shall be classified as "B" items.

4. Objective of ABC Analysis

The Purpose of carrying out ABC analysis is to develop policy guidelines for selective control.

4.1 ‘A’ Items

Tighter and accurate procedures are essential for "A" category items relatingto (i) forecasting, (ii) material planning, (iii) value analysis, (iv) lead timeanalysis, (v) market research, source selection, source development andfollow-up (vi) safety stock determination, (vii) materials consumption control,(viii) physical stock verification, (x) stores, and (xi) accounting and inspection.

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4.2 ‘B' Items

The stocking policy for 'B' items need not be highly sophisticated. For theItems which are available ex-stock or of the shelf or in the near proximity, the Re-order level shall be fixed at 3 1/2 - 4 months stock.Periodic review system & re-order point system to be followed for these items.

4.3 'C' or low value items

Procurement for these items shall be made in one or two lots per annum i.e. Procurement for 6 months or 12 months at a time as far as practicable. Items which are perishable or bulky shall be omitted from this arrangement.'C' items shall be reviewed once a year according to a phased time table or when reorder level is reached if that is earlier.

5. Periodic Review System

As per this system supply to be arranged at fixed intervals of time of 3months. This system can be followed for process chemicals as theconsumption pattern is known. Order to be placed for yearly requirement for supply in 4 instalments, after every 3 months. Review to be done at the end of the quarter & supply for the next quarter regulated as per requirement

6. Re-order Point System

In case of regular consumption items whose consumption pattern fluctuates re-order point system to be followed. Keeping the lead time in view re-order point an order for fixed quantity to be processed. The quantity to be ordered is fixed and only frequency of ordering varies.

7. Spares 7.1 Spares may be divided into following groups: a) Spares purchase with capital goods imported from abroad or in Indiaincluding insurance spares.b) Imported spare parts.c) Fast moving and moderate moving spare parts of regular consumptionwhich fall within category ‘C’ or ‘B’ or ‘A’.d) Slow moving spare parts and spare parts with erratic consumption, for

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7.2 The stocking policy shall be as follows

i) Spare purchase with capital goods imported from abroad should as far as possible be initially fast moving spares and medium moving spares. The slow moving spares and the insurance spares shall normally be obtained after gaining actual experience in the working of the machines for a few months to avoid danger of importing items in excess which may not be required. Similar arrangements may be followed for indigenous machinery spares.ii) Imported spare partsFor these the stocking policy shall be in line with the import policy and ad-hoc imports shall be made in consultation with the using departments according to the availability of import licence and the general policy stated above.iii) Fast moving and medium spare parts of regular consumption and ofcategory 'C' and 'B' or 'A'. The stocking policy shall be the same as for any other 'C' items, and repetitive regular 'B' and 'A' itemsiv) Slow moving spares parts and spare parts with erratic consumption.Probabilistic studies shall be made for such items to determine probability or usage and dangers of stock-out over a period of years together with cost of carrying inventory versus loss due to stock-out.

8. Other classifications of Items in InventoryIn addition to ABC and VED analysis, the other type of selective analysis that may be used are:FSN - Fast moving, slow moving, non-moving.NON MOVING - Items against which there is no issue for last three years or above would be treated as non-moving.XYZ - Based on inventory values of items. A `X’ category items has very high inventory value whereas a `Z’ category item has very slow inventory value.XYZ would be categorised as under:-X - Items having stock value > Rs.5,00,000.00Y - Items having stock value > Rs.1,00,000/- to Rs 5,00,000.00Z - Items having stock value < Rs.1,00,000.00HML – High unit price (> Rs 1.00 lac), medium unit price Rs 50,000.00 to Rs100,000.00), low unit price (up to Rs 50,000.00) of the items.SDE – Scare, difficult and easy to procure items. Items under this category will be Refinery unit specific.

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List of selected Class A items

Material Amount(Value) Quantity2-ETHYL-HEXYL-NITRATE 158,668,140.00 INR 1,614.37 TOFRESH FCC CATALYST 29,572,183.13 INR 192.871 TOROTOR,DYN BALANCED,W/CPLG HUB 17,686,323.00 INR 1 EAPLATINUM IN SPENT CATALYST 16,105,348.00 INR 14,607.00 KGROTOR ASSY 14,756,045.00 INR 1 EARANDOM PACKING FOR COLUMN 9,121,340.00 INR 1 M3BUCKET,TURBINE STAGE 1 KIT,P/N:35306090 8,887,997.00 INR 1 EADHDT CATALYST ACT 961 7,796,626.00 INR 9,000.00 KGPIPE,SS,EFW,A358TP321,CL1,BE,10IN,160,H2 7,663,400.91 INR 114 MPLATE,CS,IS 2062,A,6300x1500x8mm 4,519,704.05 INR 96.749 TOPIPE,AS,EFW,A691,GR9CR,CL42,BE,26IN,9.53 4,335,897.89 INR 45 EADHDT CATALYST ACT 645 4,250,873.00 INR 4,000.00 KGPLATE,CS,IS 2062,A,6300x1500x6mm 4,178,605.45 INR 113.237 TOSODIUM HYDROXIDE,CAUSTIC SODA LYE,NaOH 4,028,713.81 INR 198.612 TOBEND,90,XLR,BW,AS,A387,P12,20IN,30 3,913,414.89 INR 15 EADIMETHYL DISULPHIDE(DMDS) 3,683,208.60 INR 24 TOFUEL NOZZLE F/GAS TURBINE,MS 5001 3,641,467.00 INR 10 EATEE,EQ,BW,AS,A387,P12,10IN,40 3,630,011.50 INR 52 EA

List of selected Class B items

Material Amount QuantityT/M,D/P,ELECY,0-2500 MM WC 498,761.44 INR 23 EABARRIER,INTER PHASE,CT,F/6.6kVJYOTI VCB 498,420.00 INR 30 EAROTATING ASSY ( P200 ),P/N10 498,000.00 INR 1 EAFABRIC ELT ASSY,MULTILAYER COMPOSITE 496,771.00 INR 30 M2TR,DP,SMART,0-5000MMWC 496,705.00 INR 23 EASEPARATOR FILT ELMNT,WD-873,EST-423-02 494,879.00 INR 52 EATURNSTILE,3/4HEIGHT,90D-STOP,4WAY,BDR 494,410.00 INR 3 EAPOSITIONER F/C/V,MIL FISHER 493,453.33 INR 20 EALINE CHOKE& TERMINATOR F/COK-A EOT CRAN 493,262.00 INR 2 EADETECTOR,FLAME(28FD) 492,668.00 INR 2 EAVLV,CHK,LIFT,A217 C5,A217 C5,FLG,300,8IN 492,649.18 INR 10 EAPIPE,AS,SMLS,A335,GRP5,BE,3IN,40 491,768.51 INR 716.89 MFUEL OIL BYPASS VLV ASSY 491,676.35 INR 1 EA

List of selected Class C items

Material Amount QuantityCT,200/1-1A,1.5VA 52,563.79 INR 3 EA

SECONDARY SEAL,RPH-ECM-25-180,KSB 52,560.00 INR 2 EA

ELBOW,90DEG,LR,ASTM A 815,8IN,S20 52,526.00 INR 1 EA

PKG,ROTARYHD,FSL,PBSCART 52,517.96 INR 6 EA

GASKET,GRAFOIL,P/NO 152.1 52,508.00 INR 5 EA

RTV SEALANT (0000B ),P/N 110 52,500.00 INR 2 EA

PIPE,MS,EFW,IS3589,410,BE,28IN,10MM THK 52,437.00 INR 10 M

VIRGO VLV ACTUATOR FAIL SAFE OPEN 100M 52,428.00 INR 2 EA

LAMP,LED IND,10W,22.5MM,24VDC,LVGP 52,401.51 INR 328 EA

FL,SP.BL,FF,CS,A105,300,4IN 52,387.17 INR 36 EA

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IMPORTANT CONCEPTS IN IVENTORY MANAGEMENT

JUST IN TIME (JIT) PRODUCTION

Just-in-time (JIT):- is defined in the APICS dictionary as “a philosophy of manufacturing based on planned elimination of all waste and on continuous improvement of productivity”. Waste results from any activity that adds cost without adding value, such as the unnecessary moving of materials, the accumulation of excess inventory, or the use of faulty production methods that create products requiring subsequent rework.  JIT should improve profits and return on investment by reducing inventory levels (increasing the inventory turnover rate), reducing variability, improving product quality, reducing production and delivery lead times, and reducing other costs (such as those associated with machine setup and equipment breakdown).  In a JIT system, underutilized (excess) capacity is used instead of buffer inventories to hedge against problems that may arise.

JIT applies primarily to repetitive manufacturing processes in which the same products and components are produced over and over again. To accomplish this, an attempt is made to reach the goals of driving all inventory buffers toward zero and achieving the ideal lot size of one unit.

The basic elements of JIT were developed by Toyota in the 1950's, and became known as the Toyota Production System (TPS).  JIT was well-established in many Japanese factories by the early 1970's.  JIT began to be

adopted in the U.S. in the 1980's

Some Key Elements of JIT

1. Stabilize and level the MPS with uniform plant loading (heijunka in Japanese):- create a uniform load on all work centers through constant daily production (establish freeze windows to prevent changes in the production plan for some period of time) and mixed model assembly Meet demand fluctuations through end-item inventory rather than through fluctuations in production level.  Use of a stable production schedule also permits the use of back flushing to manage inventory: an end item’s bill of materials is periodically exploded to calculate the usage quantities of the various

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components that were used to make the item, eliminating the need to collect detailed usage information on the shop floor.

2. Reduce or eliminate setup times:- aim for single digit setup times (less than 10 minutes) or "one-touch" setup -- this can be done through better planning, process redesign, and product redesign.  A good example of the potential for improved setup times can be found in auto racing, where a NASCAR pit crew can change all four tires and put gas in the tank in under 20 seconds.  (How long would it take you to change just one tire on your car?)  The pit crew’s efficiency is the result of a team effort using specialized equipment and a coordinated, well-rehearsed process.

3. Reduce lot sizes (manufacturing and purchase):- reducing setup times allows economical production of smaller lots; close cooperation with suppliers is necessary to achieve reductions in order lot sizes for purchased items, since this will require more frequent deliveries.

4. Reduce lead times (production and delivery):- production lead times can be reduced by moving work stations closer together, applying group technology and cellular manufacturing concepts, reducing queue length (reducing the number of jobs waiting to be processed at a given machine), and improving the coordination and cooperation between successive processes; delivery lead times can be reduced through close cooperation with suppliers, possibly by inducing suppliers to locate closer to the factory.

5. Preventive maintenance: use machine and worker idle time to maintain equipment and prevent breakdowns.

6. Flexible work force:- workers should be trained to operate several machines, to perform maintenance tasks, and to perform quality inspections.  In general, JIT requires teams of competent, empowered employees who have more responsibility for their own work.  The Toyota Production System concept of “respect for people” contributes to a good relationship between workers and management.

7. Require supplier quality assurance and implement a zero defects quality program:- errors leading to defective items must be eliminated, since there are no buffers of excess parts.  A quality at the source (jidoka) program must be implemented to give workers the personal responsibility for the quality of the work they do, and the authority to stop production when something goes wrong.  Techniques such as "JIT lights" (to indicate

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line slowdowns or stoppages) and "tally boards" (to record and analyze causes of production stoppages and slowdowns to facilitate correcting them later) may be used.

8. Small - lot (single unit) conveyance :- use a control system such as a kanban (card) system (or other signaling system) to convey parts between work stations in small quantities (ideally, one unit at a time).  In its largest sense, JIT is not the same thing as a kanban system, and a kanban system is not required to implement JIT (some companies have instituted a JIT program along with a MRP system), although JIT is required to implement a kanban system and the two concepts are frequently equated with one another.

KANBAN PRODUCTION CONTROL SYSTEM

A kanban or “pull” production control system uses simple, visual signals to control the movement of materials between work centres as well as the production of new materials to replenish those sent downstream to the next work center.  Originally, the name kanban (translated as “signboard” or “visible record”) As implemented in the Toyota Production System, a kanban is a card that is attached to a storage and transport container.  It identifies the part number and container capacity, along with other information, and is used to provide an easily understood, visual signal that a specific activity is required.

In Toyota’s dual-card kanban system, there are two main types of kanban:

1. Production Kanban : - signals the need to produce more parts

2. Withdrawal Kanban :- (also called a "move" or a "conveyance” kanban): signals the need to withdraw parts from one work center and deliver them to the next work center.

In some pull systems, other signalling approaches are used in place of kanban cards.  For example, an empty container alone (with appropriate identification on the container) could serve as a signal for replenishment.  Similarly, a labelled, pallet-sized square painted on the shop floor, if uncovered and visible, could indicate the need to go get another pallet of

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materials from its point of production and move it on top of the empty square at its point of use.

A kanban system is referred to as a pull-system, because the kanban is used to pull parts to the next production stage only when they are needed.  In contrast, an MRP system (or any schedule-based system) is a push system, in which a detailed production schedule for each part is used to push parts to the next production stage when scheduled.

Dual-card Kanban Rules:

1. No parts are made unless there is a production kanban to authorize production. The process remains idle, and workers perform other assigned activities.  This rule enforces the “pull” nature of the process control.

2. There is exactly one kanban per container. 3. Containers for each specific part are standardized, and they are always

filled with the same (ideally, small) quantity.  (Think of an egg carton, always filled with exactly one dozen eggs.)

Decisions regarding the number of kanban (and containers) at each stage of the process are carefully considered, work-in-process inventory at that stage. For example, if 10 containers holding 12 units each are used to move materials between two work centers, the maximum inventory possible is 120 units, occurring only when all 10 containers are full.  At this point, all kanban will be attached to full containers,

REORDER POINT

In the EOQ model, the lead-time for procuring material is zero. Consequently, the reorder point for replenishment of stock occurs when the level of inventory drops down to zero. In view of instantaneous replenishment of stock the level of inventory jumps to the original level from zero level. In real life situations one never encounters a zero lead-time. There is always a time lag from the date of placing an order for material and the date on which materials are received. As a result the reorder level is always at a level higher than zero.

The two factors that determine the appropriate order point are the procurement or delivery time stock which is the Inventory needed during the

46

lead time (i.e., the difference between the order date and the receipt of the inventory ordered) and the safety stock which is the minimum level of inventory that is held as a protection against shortages.

Reorder Point = Normal consumption during lead-time + Safety Stock.

Several factors determine how much delivery time stock and safety stock should be held. In summary, the efficiency of a replenishment system affects how much delivery time is needed. And the determination of level of safety stock involves a basic trade-off between the risk of stock-out, resulting in possible customer dissatisfaction and lost sales, and the increased costs associated with carrying additional inventory.

Another method of calculating reorder level involves the calculation of usage rate per day, lead time which is the amount of time between placing an order and receiving the goods and the safety stock level expressed in terms of several days' sales.

Reorder level = Average daily usage rate x lead-time in days.

From the above formula it can be easily deduced that an order for replenishment of materials be made when the level of inventory is just adequate to meet the needs of production during lead-time.

If the average daily usage rate of a material is 50 units and the lead-time is seven days, then Reorder level =Average daily usage rate x Lead time in days = 50 units x 7 days = 350 units

When the inventory level reaches 350 units an order should be placed for material. By the time the inventory level reaches zero towards the end of the seventh day from placing the order materials will reach and there is no cause for concern.

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level of inventory average

inventory

unitsQ

t time

Sawtooth Model

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ECONOMIC ORDER QUANTUTY (EOQ)

It minimizes the sum of holding and setup costs. Assumptions of EOQ are as follows:

1. The supply of goods is satisfactory. Goods can be purchased whenever required.

2. Quantity to be purchased is known and certain.

3. Prices of the goods are stable resulting into stabilization of carrying costs.

When above conditions are satisfied, EOQ can be calculated using the following formula:

EOQ = (2AS/I) ^ (1/2) where

A = Annual demand or consumption

S = setup or ordering costs

I = inventory carrying cost per unit

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SAFETY STOCK

Safety or buffer stock is held in excess of cycle stock because of uncertainty in demand or lead time. The notion is that a portion of average inventory should be devoted to cover short range variations in demand and lead time. It is used to prevent stock out.

Inventory analysts, when controlling stock set the minimum stock level at the lowest stock level that an organization is prepared to tolerate, this is usually set at greater than zero in order to counter delivery delays or spikes in demand. If safety stock is not present, stock outs could occur which could be drastic to production runs or even worse risk delays to end customer. Safety stock then is a necessary evil because it assumes that demand cannot accurately be forecasted and/or suppliers fail to deliver on time (both common business scenarios). The level of safety stock varies from one organization to another but typically balances the cost of stock holding on one hand against the cost of stock outs on the other.

Calculation of safety stock:

Safety stock = demand variation + ((monthly demand/25)*supplier delay in days)

AVERAGE INVENTORY

Average inventory is one of the important tools of inventory management. It tells how much stock is being used in the organization. Average inventory includes the work in progress goods and also the safety stock. Generally average inventory is calculated using the following formula:

Average inventory = ((monthly consumption/frequency schedule)/2) + WIP + safety stock

The WIP is calculated as follows:

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WIP = throughput time / cycle time

Throughput time refers to the time taken by the part to enter into the assembly and come out as a finished good. Cycle time refers to the time taken to manufacture a machine per day.

AVERAGE INVENTORY PERIOD

It is one of the techniques of inventory management. It tells stock with the organization can be used for how many days. So the organization can place an order with the help of this and can also know whether the stock in hand when put in use will sustain till the receipt of the order.

Average inventory period is calculated using the formula:

Average inventory period = (average inventory * 365) / (total monthly consumption * 12)

FACTORS INFLUENCING INVENTORY MANAGEMENT

AND CONTROL

Several factors influence inventory management and control. The principal effects of these are reflected most strongly on the levels of inventory and degree of control, planned in the inventory control system. These factors are as follows:

1. Product type:

Among the factors which influence inventory management and control, the type of the product is the fundamental one. If the materials used in the manufacture of the product have a high unit value when purchased, a much closer control is in order. If the materials used in the product is in short supply or is rationed by the government, this may influence the purchase of these materials and their stock maintained. The manufacture of the standard products, as compared to custom made items, will influence the inventories.

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2. Manufacture type:

Besides the type of product, the type of manufacture also influences the inventory management and control. Where continuous manufacturing is employed, the rate of production is a key factor. Here, inventory control is of a major importance and in reality controls the production of the product. The economic advantage of this type of manufacture is the uninterrupted operations of the machines and assembly lines in the plant. It is a major offence on the part of inventory personnel to have a plant shut down for the lack of material; intermittent manufacture, on the other hand, permits greater flexibility in the control of the material.

3. Volume:

The volume of product to be made as represented by the rate of production may have a little effect on the complexity of the inventory problem. Literally, millions of brass bases for light bulbs are manufactured each month involving control of only two principal items of raw material inventory. On the other hand, the manufacture of large locomotives involves the planning and control of the thousands of items of inventory. Both the inventory problem and difficulty of controlling production increase in difficulty with number of component parts of the product and not with the quality of the products to be made.

The other factors are:

The objective of the company as it relates to the inventories and the level of service to be provided to the customers.

The qualification of the staff personnel who will design and coordinate the implementation of the system.

The capabilities of the personnel who will be responsible for managing the system on a continuous basis.

The nature and size of the inventories and their relationship to other functions in the company, such as manufacturing, finance and marketing.

The capacity of the present and future data processing equipment.

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The potential savings that may be anticipated from improved control inventories.

OIL MANAGEMENT

53

CRUDE OIL IMPORTS

INTRODUCTION:

Crude oil is imported by IOC for requirement of IOC, CPCL & BRPL. The crude oil is sourced mainly from Gulf countries, West African Countries, Malaysia, Brunei etc. crude is transported through Tankers vessels and discharged at Vadinar / Mandra for Western coast refineries and at Kakinada / Vizag / Sandheads for Eastern coast refineries.

Following are the major elements of payments for crude oil imports:

- FOB- Freight

- Charter Hire

- Demurrage

- Insurance

- Survey Fees

- Port Charges

- NMA / OTD Charges

- Lighterage Charges & Port Dues

- Other Related Charges

Payments like FOB, Freight, Survey Fees, Demurrage etc. are made US Dollar for beneficiaries. In case of Indian Vessel owner the payment for Freight / Demurrage etc. are made in equivalent INR by suitable currency exchange rates agreed in charter Party / COA. Insurance premium for each cargo is paid in INR to the Indian Insurance Co. with whom Marine Transit policy is taken.

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Crude oil procurement and payment:

1. Tender for crude oil procurement is finalized by International Trade on the following basis:

a. Term Contract (Mainly annual contract with fixed term)

b. Spot contract (Monthly / Quarterly Contract)

2. Shipping finalizes with the supplier and line up vessel for loading. A Loadport Surveyor is appointed for executing loading function on behalf of buyer at load port.

Letters of Credit for Crude Imports:

Letters of Credits are opened by Finance as per request of Shipping for the proposed crude oil loadings from concerned Supplier. The LCs are opened through empanelled Bankers in line with the guidelines issued from time to time by Corporate Office. LCs are opened as per terms and conditions of the import contracts entered into by IOCL with the supplier.

Shipping Department advises requisite details of the Loading and the LC values to Finance. Finance after following the tendering process, opens the LC as per the format prescribed in the Import Contract.

After establishment of the LC , a copy of the same is forwarded to Shipping for loading operations.

Currently LCs are opened for imports from:

- Saudi Aramco : Irrevocable, Standby letter of Credit to be confirmed by Saudi Banks (if LC opening banks are Indian Banks) / to be advised by JP Morgan Chase, London if LC Banks are any International Banks approved by S Aramco.

- SOMO: Irrevocable, regular Letter of Credit for each loading separately, to be opened through approved banks and to be confirmed and advised to SOMO by Central Bank of Iraq, Baghdad.

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-NIOC, Iran: Irrevocable, regular Letter of Credit for each loading separately, to be opened through approved Banks and to be confirmed and advised to NIOC by Bank Markhazi Jhomhouri Islami (BMJI), Tehran.

Crude Oil FOB Payment Cycle:

1. Invoices from the supplier are received by Shipping department. Shipping prepares US Dollar cash flow containing the daywise details of FOB payments. Details include Supplier, Tanker name, Tanker flag, quantity, unit price, FOB value, date of payment and disport location.

2. Based on the cash flow a daily fund requirement statement is advised to CO (treasury) and receipt from OMC for their share of import is projected.

3. Treasury based on the fund position decides on the mode of payment i.e.; through currency purchase or through availment of loan and advises the same to RD (Finance) for execution.

4. Based on the above advice from treasury, the remittance is executed by Refinery Finance.

Flow of documents:

1. Shipping department receives the following documents:

a. Invoiceb. Bill of entry

c. Certificate of quality and quantity

d. Certificate of origin

e. Letter of indemnity, where b, c , d above are not available.

After calculating the FOB value based upon the pricing formula and contract, shipping Finance certifies the payments and forwards the same to finance for payment.

2. After receipt of complete set of documents from shipping, Finance cross checks the complete particulars of payments including

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calculations, based on contract terms, and advises corporate Office (Treasury) final value for FOB payment. Necessary debit notes are raised on CPCL / BRPL.

3. Based on the plan advised by CO (T), the FOB payments are effected to the beneficiary either through Loan Availments or Currency Purchase.

Demurrage payment Cycle:

1. Shipping department negotiates the demurrage claim with the party and finalizes the demurrage claim payable to the vessel owner.

2. The demurrage claim is examined, concurred and approved by the competent authority in shipping department as per delegation of authority.

3. After approval shipping forwards the payment papers to Finance for remittance of the same.

4. Payment of demurrage less than USD 1 million is made through SBI-CAG, Mumbai directly. Payments more than USD 1 million would be effected through currency purchases from CO (Treasury).

5. Finance executes necessary documentation to effect the remittance.

Flow of documents:

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1. Shipping collects the following documents and forwards to Finance for payment:

a. Invoice

b. Fixture note / charter party copy

c. Calculation of demurrage payable

d. Approval note

After receipt of complete set of documents from shipping, Finance verifies same for amount validation. Approval for payments as per DOA and payment instructions validation as per Charter party / Fixture note, and arranges for remittance.

2. From gross demurrage deductions for Brokerage and Address commission are effected and net amount is paid to the Vessel Owner / Beneficiary. Address commission is an income to IOCL; hence demurrage cost is accordingly reduced. Brokerage is separately paid to the shipping agents on receipt of their brokerage. Invoice in INR at the same exchange rate at which demurrage amount was paid to the vessel owner.

Accounting entries:

Based upon the bank advice, demurrage value in INR is computed for each cargo and accounting entry is passed based on B/L holder and sharing for each OMC.

Difference in INR between the liability created and the actual payment to the vendor is debited / credited to the Exchange Fluctuation a/c.

FREIGHT:

Freight is the charge payable to the Tanker vessel for the crude oil transported from the various load ports to the disports of IOC at Vadinar / Mundra (on the West Coast) and at Haldia / Sandheads / Kakinada (on the East Coast). The charges for freight are enumerated in the Agreement

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with Vessel Owners called Charter Party Fixture Note along with other conditions of the transportations.

CHARTERING:

The process of hiring or fixing a ship for transportation of crude oil is called Chartering and the hirer (IOCL) is called “Charterer”. The three parties involved in the process of chartering are as follows:

1. The Charterer (IOCL) 2. The Vessel Owners

3. The Broker(through whom the Vessel is fixed)

Types of chartering:

The chartering is done on the following basis:

1. Voyage Chartering

a. Consecutive Voyage (CV)

b. Contract of Affreightment (COA)

2. Time Chartering

SHIP TO SHIP (STS) TRANSFER OPERATION COST:

Crude oil to Haldia fed refineries is supplied through daughter vessels after lighterages of Mother Vessel at Kakinada / Sandhead / Vizag based on the sea conditions during the year. IOCL has entered into contract with M/s Kakinada Seaport Ltd (KSPL) for carrying ship to ship transfer operation at Kakinada. As per present agreement mother Vessel port dues are paid @ USD 0.03/GRT, Daughter Vessel port dues @ Rs 6 / MT for port services and @ Rs 12 / MT for mooring / bunkering and water charges.

The following charges are accounted for through T code YMIROOTH, Invoice Verification process. A separate line item is created in purchase order for booking this cost.

NMA / OTD Charges:

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In case of import of Nigerian crude, charges are paid to Nigerian Maritime Authority (NMA) and Nigerian Port Authority (NPA). NMA charges are levied at the rate of 0.36 cents on gross metric tons quality; whereas NPA charges are levied at the rate of 0.03 cents on net barrels quantity.

Vessel owner and Charterer depending on the terms agreed upon in charter party share the above charges. These charges are paid by vessel owner directly, and later reimbursed by IOCL. These charges are also accounted for as freight by running T-code YMIROOTH.

Port Charges:

Port charges at load port / disport are borne by IOCL depending on the agreement between the vessel owner and the charterer i.e. as per the clause of Charter party. Vessel owner prima facie pays port charges to the Port Authority and claims reimbursement From IOCL for the same, if the port charges of disport are not included in the World Scale rate applicable for the voyage. Reimbursement is effected to the vessel owner based on Invoice raised by the vessel owner for the same duly certified by shipping for payment, and forwarded to Finance along with necessary supporting documents like Port Trust Invoices, remittance account details , payment proof etc. the amount to be paid in USD / INR is certified by Shipping department . Finance department releases the payment after verifying its admissibility as per charter party and port tariff rates.

This cost is also accounted for by using T-code YMIROOTH by giving subsequent debit in freight line item.

Survey Fees:

Load port survey is conducted by approved surveyors. Approval for surveyors and survey fee is taken by Shipping department on monthly basis. Invoices in USD are raised by the surveyors periodically. These invoices are certified by Shipping department and sent to Finance for payment. Survey fee as per Bank advice is booked in books by T-code YMIROOTH i.e. invoice verification process in respective Purchase orders.

FUNCTIONS OF FINANCE - STORES SECTION

The section dealing with accounting of stores in the Finance shall have following function:

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(i) Passing and accounting of transportation bills / demurrage bills of railways/ shipping etc.

(ii) Stock verification

(iii) Accounting for sale of surplus and scrap materials

(iv) Dealing with stock transfer cases

PASSING AND ACOUNTING OF TRANSPORTATION BILLS

1. All railways/streamer/air freight inward receipt and the road transport consignment notes shall be received in the stores section of materials for taking the delivery of the consignment. the store shall enter these documents in a Daily Receipt Register.

2. Transport bill will be initially received by the Materials and sent to Finance duly verified with reference to the purchase order and also linking the same with the GR Notes. The certified bills of freight received from stores section shall be priced doing YMIROOTH transactions wherever the freight bill is directly linked to a purchase order. The Finance will release payment only after due checking of bills with reference to the transport calls and other relevant documents. In case the freight bill cannot be linked to the purchase order the same shall be charged to freight expenditure amount.

3. Road transport contracts involving large amounts shall be finalized after obtaining competitive quotations in accordance with the prescribed tendering procedure. Prior occurrence of Finance and approval of competent authority shall be taken.

Road transport consignment received is of two types:

(i) Where freight cost is included in the suppliers invoice. Suppliers of the goods should indicate the freight amount and the service tax in the supply invoice to IOCL so that CENVAT credit can be taken on the service tax portion of the freight amount.

(ii) In other cases, consignments are received on freight to pay basis where freight bills are raised by the transporter for payment.

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4. Payment of transport bills of small values may be permitted through impest account held by the Materials. The limit in this regard shall be fixed at the unit level. Materials while rendering the impest account, for payment of the transport bills shall indicate GR Notes particulars against which the materials have been taken on charge. However, payments exceeding Rs. 20,000/- in each case shall be made only by crossed account payee cheque/ demand draft.

5. For all freight bills, passed payment vouchers shall be prepared and signed by the authorized officers after which the same shall be forwarded to the Cash Section for preparation of cheque and payment to vendors.

6. The freight charges shall be accounted in SAP depending upon the purchase order condition. Based on actual on invoice a MIRO transaction is done which will automatically adjust the cost of inventory based on the status of the material. The same is true for all other cost incurred for procurement of materials. The section should review on periodical basis the freight clearing account for necessary action.

7. The section shall also be responsible for passing petty bills on account of loading, unloading and handling of materials on the basis of certification by the Materials Department, Stores and as per the contract, if any.

LIST OF IMPORTANT TRANSACTION CODES

SL.NO. T- CODE PURPOSE

1. MIGO Goods movement (receipts & issues)

2. MIRO Invoice verification for customs & related duties

3. YMIROOTH For passing transportation bills in relation

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to Purchase Order

4. FB60 Passing other Transportation bills

5. MCYG For extracting slow moving & non-moving inventory

6. YMR160 Stock Verification Report

7. MC9 Inventory Status

8. MMBE Current Stock

9. MB5L Stock in relation to General Ledger code (used for value reconciliation)

10. MB1B Transfer Posting

11. MBBS Project Stock

12. YMR146 PSL Report

13. MB5B Stock as on Posting Date

14. J1IS Creation of Cenvat Invoice for inter unit transfer

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IMPORTANT PRODUCTS

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Products from Refinery

PRODUCTS

Light Distillate %

LPG

SRN

REFORMATE

MS(BS-II)

Middle Distillate %

SK

HSD (BSD-II)

HSD (EURO-III)

LDO

Total Distillate %

LSHS

RPC LS

RPC HS

BITUMEN

CBFS(high BMCI)

SULPHUR

HSD Ex-HBPL

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The Refinery is capable of producing about 8 lakh tonnes of petrol, 3 lakh tonnes of jet fuel, 12 lakh tonnes of Kerosene & 26 lakh tonnes of Diesel annually. Other products include Naphtha, Mineral Turpentine Oil, Bitumen, Sulphur etc. Besides, about 2.4 lakh tonnes of cooking gas is presently made available to the people.

 

 

 

 

 

 

CRUDE FLOW OF BARAUNI REFINERY

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SKO

ATF

MOTOR SPIRIT

NAPHTHA

LPG

BITUMEN

HSD

Historically IOC was the sole canalizing agency of crude oil for this nation

having increasing demand of petroleum products posed by rapid forecasted

growth in industrial as well as consumer sector. Lately from April-01 1998

with the opening of the industry from the closely held government sector to

the globally competitive private sector, the scenario of crude of crude oil

exploration within the country and import there of also underwent change

considering the dynamics of the changes in price per barrel of crude oil in

the international market. The government allowed import of crude to all

refining companies independently.

In Indian Oil, crude oil was centrally procured based on the planned

production at all refineries through its specific cell at the marketing division

office Mumbai, which was also responsible to procure petroleum products

from international market to fill the gap between the national demand and

indigenous production. From 2003 onwards the procurement of crude oil

segregated by making a specific cell namely “Shipping Department” located

at Refineries Headquarter Delhi and since then this department is

exclusively handling the procurement of crude oil both from India as well as

international market to meet the production requirement various refineries

and its subsidiaries.

The crude oil for Barauni refinery was initially sourced exclusively from

oil fields of Assam through Oil India Pipeline. But due to utilization of

available crude in North-East itself after commissioning of Numaligarh

Refineries, Barauni Refinery has been fully sourced by imported crude from

2001-2002. To make this feasible, a new Pipeline namely Haldia Barauni

Crude Pipeline (HBCPL) was constructed and for economic viability of

fresh investment the old refinery management has roughly invested Rs.

2000 cr. in expanding the refinery to 6 MMTPA in 2002-2003.

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The crude movement take place in very large crude carriers (VLCC)

up to the Bay of Bengal but due to the poor sea condition can’t reach Haldia

port directly. This necessitates transhipment of crude in high sea to smaller

vessels which in turn bring the crude up to the port where it is unloaded in

custom bonded tanks before being pumped through HBCPL. This particular

movement of transhipment involves additional costs in the nature of

4. Freight of daughter vessels

5. Demurrage of VLCC

6. Additional wharfage

To this additional cost is putting Barauni Refinery into a sort of

disadvantage in comparison to other west coast Refineries. Considering the

scene management is implementing a new pipeline project to connect

HBCPL with Paradip port to which place VLCC’s will be directly wharfed

and above additional expenditures can be avoided. There is another

additional expenditure which is specific to Barauni Refinery and doesn’t

apply to many Refineries of India is “Entry Tax”. This has been contested

by the management in the Court of Law on Constitutional grounds and stay

off 50% has been obtained from High Court, decision of which is pending

in Supreme Court.

Normally the cost constituents of Imported Crude is as under

1. Basic Costs

2. Marine Freight

3. Marine Insurance

4. Custom Duty

5. Port Expenses

6. Cost of Inland Transportation

There are three stages where costs can be reduced. These are

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1. While procurement of crude

2. During process stage

3. Transportation inward as well as outward.

1. While procuring crude oil we can use certain buying methods

such as forward buying, hedging etc. These techniques certainly help in

reducing the overall cost of crude. Apart from this we can also reduce the

cost of crude by selecting the right crude mix.

2. During process stage we can reduce cost by cutting the

operating costs such as Power & Fuel, Chemicals, Catalysts & Consumables,

Repairs and maintenance, Administrative overheads, Depreciation. Apart

from this we can check the Fuel & Loss.

3. We can also reduce the transportation costs of crude oil and also the

finished products. To reduce the transportation cost of the crude oil Indian

Oil is implementing a new project namely Paradip-Haldia Crude Pipeline

Project. This is a very important project as it will reduce the transportation

cost substantially.

PARTICULAR2003-2004

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

THROUGHPUT(TMTs) 2993.4 4303.5 5082.545 5553.165 5469.111 5634

1. TRANSFER OF 400555 565773 887370 1234873 1386166 1568810

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PRODUCTS( Rs. Lakh)2. POOL A/C ADJUSTMENTS (Rs. Lakh) 4752 1500 -84 0 0 0TRANSFER OF PRODUCTS (NET):1+2 405307 567273 887286 1234873 1386166 15688104. STOCK VARIATION ( Rs. Lakh) 767 7266 15702 3583 6668 13305. VALUE OF PRODUCTION (Rs. Lakh) 406074 574539 902988 1231290 1392834 15701406. (a) CST OF RAW MATERIALS ( Rs. Lakh) 353549 497344 799102 1147209 1335133 1449061(b) OTHER RAW MATERIALS (Rs. Lakh)      (c)DEMERRAGE ON CRUDE (Rs. Lakh) 895 1325 4807 3822 8312 6302

( d) NATURAL GAS      TOTAL COST OF RAW MATERIALS (Rs. Lakh) 354444 498669 803909 1151031 1343445 14553637. GROSS MARGIN ( 5 - 6 ) (Rs. Lakh) 51630 75870 99079 80259 49389 114777

Fig: - Throughput / Annum

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  CAPACITY UTILISATION

YEAR INSTALLED CAPACITIES

THROUGHPUT (MMT) %

    

2002-2003 4.2 MMT 2.880  68.62003-2004 4.2 MMT 2.994 71.32004-2005 6.0 MMT 4.304  71.72005-2006 6.0 MMT 5.083 84.72006-2007 6.0 MMT 5.554 92.52007-2008 6.0 MMT 5.469 91.22008-2009 6.0 MMT 5.634 93.8

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Fig: % CAPACITY UTILISATION

DISTILLED YIELD %PRODUCT RECOVERY %

YEAR    

2001-2002 83.18 92.52

2002-200384.9 91.16

2003-200484.6 88.09

2004-200585.6 88.68

2005-200685.5 89.86

2006-200786.2 89.94

2007-200885.8 89.74

2008-200986.2 91.26

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CONCLUSION

1. IOCL, Barauni is a major contributor in oil production in India. At present its production capacity is 6 MMTPA, producing a wide range of petroleum products.

2. Repairs and Maintenance cost of the Refinery is decreasing per MT. It has decreased from Rs. 130 in 2000-01 to Rs. 85 in 2004-05 but from 2005-06 there is an increment in repairs and maintenance cost. It has increased since 2005-06 from Rs. 85 to Rs. 177 in 2007-08.

3. Inventory management is mainly based on ABC analysis. It is better compared to other oil producing companies.

4. As the company may increase its production the imported items would be costly with the depreciation of INR.

5. The company should maintain its standards of inventory and production because it has a cut throat competition from its competitors like BPCL, HPCL and Reliance Petroleum.

6. It should reduce its lead time to have effective inventory maintenance. Supply chain management has to be given its due importance.

7. As it is a P.S.U, it can explore new areas and suppliers to increase its profitability. Mergers and acquisitions are expected.

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SUGGESTIONS

1. Continuous supply of materials and finished goods should be maintained so that production process does not suffer and customer’s demands are met.

2. EOQ and ROP should be maintained and monitored continuously.

3. Both overstocking and understocking of inventory are disadvantageous. Both should be avoided.

4. Material costs should be under control so as to reduce overall costs of production.

5. Centralizing purchases eliminate duplication in ordering or replenishing stocks.

6. Losses should be minimized through deterioration, pilferage, wastes and damages.

7. Suitable organization should be designed for inventory management. Transparent accountability should be present at various levels of organization.

8. Materials shown in the stock ledgers should be actually lying in the stores.

9. Proper quality standards ensure proper quality of stocks. The price analysis will lead to payment of proper prices.

10. Appropriate planning and control of inventory is required for fulfilling short and long term objective.

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BIBLIOGRAPHY

1. Material management Manual, IOCL

2. Oil Accounting Manual, IOCL

3. Financial Report of IOCL, Years 2007-08, 2008-09

4. www.iocl .com

5. www.indianoilxpress.com

6. Indian Oil News

7. www.google.com 8. Financial Management : Ravi. M. Kishore

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