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CHAPTER- IV

INVENTORY MANAGEMENT AT NTPC

Inventory management covers important issues to maintain optimum level of inventory

by applying various inventory control techniques or combination of techniques depending on the

nature of the item with respect to its value, criticality, market availaity and other consumption

patterns.

OBJECTIVES:

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

Elaborate inventory control techniques and procedural guidelines for their application.

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

combination of techniques.

Fixation of responsibility for undertaking various inventory analyses

.

Review and monitoring inventory status with respect to norms and levels for various

items or category of items.

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ORGANIZATIONAL STRUCTURE

The organization structure for site material department is shown here:

HOMM- Head Of Material Management:

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HOMM

Purchase

Win

Stores Wing Policy planning &

Goods Receipt

SectionCustody Mat. Planning &

Inv. Ctrl Section

Clearance &

Dispatch Grp

Inspection &

Risk/Insurance

M t Grou

Custody1

Custody2

Custody3

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CLASSIFICATION OF STORES AND SPARES:

For easy inventory analysis as well as for reporting to management in a handy and

convenient form, NTPC has codified the stores and spares under 100 main groups. These 100

main groups are further grouped as:

CONSTRUCTION STORES:

o Cement

o Steel

o Other (viz. pipe, pipe fittings, cables etc)

O & M STORES

o Coal

o Fuel

o Spares (excluding insur4ance spares)

o Loose tools

o Chemicals, gases and explosives

o Oils and lubricants

o Stores other than spares (consumables and gen. stores)

o Scrap

INVENTORY NORMS:

Inventory norms is defined as the permissible upper limit of inventory holding including

quantities for which payments have been made in part or in full in advance of receipt and

acceptance.

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1. GUIDING FACTORS FOR FIXATION OF INVENTORY NORMS:

The factors which influence optimum inventory levels are the uncertainties involved in

forecasting processing time for procurement, manufacturing and transportation variability

associated with the future consumption patter, the future market availability and the service level

promised to be provided to the end user. Based on these factors, NTPC has adopted the following

norms:

Construction stores:

o Cement 2 – 3 months usage.

o Steel 9 months usage

o Other 9 months usage

O & M Stores

o Coal - 15 days usage

o Spares - 18 months to 24

months

o Loose tools - 6 months usage

o Chemicals, gases & explosives - 3 months usage

o Oils and lubricants - 3 months usage

o Stores other than spares - 6 months usage

o Scrap - 6 months

2. MONITORING OF INVENTORY NORMS:

On the basis of inputs received from site materials management which shows the inventorystatus for 11 categories of items. The same is sent to HOMM‟s respective sites, who intern

analyze it and work out inventory turn – over ratio and compare the same with respect to set

norms in coordination with policy, planning and monitoring cell. Whenever any deviation found,

on inventory holding of particular group (s) of stores and spares with respect to norms, reason for

the deviation is established and recorded in a proper format. Further corrective actions proposed

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

CMM and higher officials.

CONSUMPTION (A,B,C) ANALYSIS:

The various limits for analyzing the inventory as per ABC classification shall be as under

However, the under mentioned limits shall be subjected to periodical review:

• A class: More than Rs 1lakh

• B class: More than Rs. 10,000 up to 1lakh

• C class: Up to Rs. 10,000/-

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

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

reaches an adequately level, computer shall identify an item as A, B, or C based on „moving

average‟ concept to take care of the situation more realistically.

STOCK HOLDING (X, Y, Z) ANALYSIS:

For ensuring continuous weeding out of unwanted inventory stock holding analysis i.e.

XYZ analysis will be of significant important. The criteria for declaring an item as X, Y, or Zshall be the same as for ABS items “on stock value consideration basis”. The analysis shall be

based n stocks held at the end of every quarter for X class items, at the end of half year for Y

class items and at the end of financial year for Z class items.

ANALYSIS BY CRITICALLY FOR OPERATION (VED):

• Vital (V): Non availability when needed involves close down of the units/resulting in

very high stocks outs.

• Essential (E): Non availability involves high stock out costs.

• Desirable (D): Non availability does not involve any significant stock out costs.

• Analysis by velocity of usage

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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. Lead time is sub-divided into the

following components:

Administrative lead time: Administrative lead time is an area where stringent control be

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

same to all the indenting department for realistic planning in raising the material indents. The

norms cannot be the same for all the projects by virtue for their work culture, geographical

locations, location of the market etc.

Supplier’s lead time: This is an area which normally falls in the domain of supplier. It is

therefore, very essential that each SMM takes cognizance of this fact ad ascertains/valuates the

time that is to be provided for manufacturers of stock lists to supply different types of materials

also taking into consideration that some of the materials may be available off the shelf. It is

therefore, essential to build a data bank of actual lead times encountered. This needs to be

updated at least once in a year, before notifying the same to all concerned.

Transportation lead time: It is very essential to build data on the normal transportation

time for different modes of transport for different important places from where the consignmentsare expected to be dispatched. This will also assist SMMS to take decisions for getting the

material with a lesser transportation lead time to meet the urgencies of plant operation. Provision

has been made in the Transport Manual for service level expected from the empanelled

transporters.

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LEAD TIME ANALYSIS:

The estimated lead time greatly influence provisioning of material particularly more sowhen there is an abrupt change in market conditions. Hence, monitoring of actual lead time for

individual items/groups of items against the estimate is very essential for alignment the planning

conditionally in line with latest trends to attain desirable service levels without increasing the

level of inventory holding.

Responsibility:

It shall be the responsibility of each Purchase Executive to collect latest data in respect of

the actual of three lead times identified above, maintain and assess, and forecast the estimated

future lead times after consulting the related vendors if need be, for various materials item

wise/trade/group wise as the case may be being procured by him and maintain the same. Issue of

lead time notification to the authorized inventors shall be the responsibility of the Head of

Material. There shall be a further review of the lead time periodically to optimize the lead time.

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RATIO ANALYSIS

&

INTERPRETATIONS

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RATIO ANALYSIS

The investment on raw material over a period of 5 year form 2003-04 to 2009 -10 is presented in

the following table.

1. INVESTMENT ON RAW MATERIALS:

Year Raw material (in lakhs)

2004-2005 13386.80

2005-2006 11690.67

2006-2007 49950.88

2007-2008 42950.66

2008-2009 46087.452009-2010 93605.78

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INTERPRETATION:

Form the above table it can be understood that the inventory of NPC was recorded at 13,386.80

during the year 2004-05 and it is increased to 93605.78 during the year 2009-10. It shows that

there is an increase in the inventory to the more extent of 80218.98. The average inventory of

NTPC was recorded at Rs.42945.41.The highest investment in inventory was recorded in the

year 2009-10

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

Raw material (in lacks)

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

2009-2010

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2. TREND ANALYSIS:

Trend analysis technique is applied to know the growth rate in investment of raw material of

NTPC over the review period which is shown in the following table.

Year Raw material (in lakhs) Trend (%)

2004-2005 13386.80 100%

2005-2006 11690.67 87%

2006-2007 49950.88 373%

2007-2008 42950.66 315%

2008-2009 46087.45 344%

2009-2010 93605.78 699%

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INTERPRETATION:The investment in inventories has increased in the year 2009-10. And the last year investment

has declined continuously. The percentage in 2007-08 was 315% as compared to years 2007-08

to 2009-10. The trends in inventories show that inventory have been more in the year 2009-10

and then it has shown a downward trend and again it increased to some extent. The investment in

inventories has shown fluctuating trend in initial years and then it raised to 699 %and again

showing fluctuating trend.

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

Raw materialsar

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3. INVENTORY TURNOVER RATIO:

This ratio indicates the number of times the stock has been turned over during the period &

evaluated the efficiency with which a firm is able to manage its inventory. This ration iscalculated by applying the following formula.

Cost of goods sold

Inventory turnover ratio =

Average inventory

Cost of goods sold Avg.inventory Ratio

2004-2005 60150.35 7402.31 8.13

2005-2006 59021.41 37975.30 1.55

2006-2007 121551.71 95065.28 12.79

2007-2008 127533.58 12390.06 10.29

2008-2009 130392.68 13338.01 9.78

2009-2010 211636.92 160035.93 1.32

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INTERPRETATION:

From the above table 2004 it can be observed that inventory turnover ratio is 8.13 during 2004-

05 and it‟s gradually decreased to 1.55 during 2005-06. As compared to all the years the ratio is

very less in 2009-10. The average inventory turnover ratio was recorded at 7.3 times during the

review period.

0

50000

100000

150000

200000

250000

Cost of goods sold

Avg.inventory

Ratio

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4. INVENTORY CONVERSION PERIOD:

It may also be of interest to see average time taken for clearing the stocks. This can be possible

by calculating inventory conversion period. This period is calculated by dividing the numbers of

the days by inventory turnover. This formula may be as:

Days in a year

Inventory conversion period =

Inventory turnover ratio

Year Cost of goods sold Avg. inventory Ratio ICP(days)

2004-2005 60150.35 7402.31 8.13 44

2005-2006 59021.41 37975.30 1.55 232

2006-2007 121551.71 95065.28 12.79 28

2007-2008 127533.58 12390.06 10.29 34

2008-2009 130392.68 13338.01 9.78 36

2009-10 211636.92 160035.93 1.32 272

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INTERPRETATION:

From the above table 2004 it can be observed that

(1) Inventory conversion period was 232 days during 2005-06 but it decreased to 204 during

2005-06, which indicates that the stock has been very quickly converted into production which

means the company is managing the Interpretation. From the above table 2004 it can be observed

that inventory turnover ratio is 8.13 during 2004-05 and it‟s gradually decreased to 1.55 during

2005-06 efficiently.

2) The lowest inventory conversion period was recorded at 28 days in the year 2006-2007 the

highest inventory conversion were recorded at 272 days in the year 2009-10. The average

0

50

100

150

200

250

300

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

Ratio

ICP(Days)

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

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5. PERCENTAGE OF INVENTORY TURNOVER CURRENT ASSETS:

In order to know the percentage of inventory over current assets the ratio of inventory to current

assets is calculated and which is presented in the following table.Inventory

Inventory turnover current assets ratio= * 100

Current ratio

Year Inventory Current assets Ratio (%)

2004-2005 13386.80 24172.33 55%

2005-2006 11690.67 28770.78 40%

2006-2007 49950.88 53063.75 94%

2007-2008 42950.66 45598.02 92%

2008-2009 46087.45 46713.32 92%

2009-2010 93605.78 86811.49 107%

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INTERPRETATION:

From the above table it can be understand that the 55% of inventory over current assets ratio was

showing trend for two years 2004-05.However from the year 2009-10 it is showing an increasing

trend. The average inventory over current assets ratio was recorded at 80%.

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

2004-20052005-20062006-20072007-20082008-20092009-2010

Inventory

Current assets

Ratio (%)

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6. PERCENT OF INVENTORY OVER TOTAL CURRENT ASSETS &

FIXED ASSETS:

Inventory / current + fixed assets

Year Inventory Current assets Ratio

2004-2005 13386.80 87167.64 15.35%

2005-2006 11690.67 87468.76 13.36%

2006-2007 49950.88 117985.89 42.33%

2007-2008 42950.66 112647.26 37.50%

2008-2009 46087.45 112637.07 40.91%

2009-10 93605.78 197330.5 47.43%

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INTERPRETATION:

During the year 2005-06 the ratio was 15.35% on its declined to 13.36% in the year 2005-06.

From the year 2006-07 it is showing fluctuating trend but as compared to above 2 years it is

increasing. The lowest Inventory over total assets ratio was recorded at 13.36% during the year

2005-06 and the highest Inventory ratio was recorded at 43.43% during the year 2009-10.The

average Inventory to total assets ratio was recorded at 32.81% during the review period.

0

50000

100000

150000

200000

250000

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

Inventory

Current assets

Ratio

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7. PERCENT OF INVENTORY OVER TOTAL CURRENT

LIABILITIES:

In order to know the percentage of Inventory over current liabilities the ratio of Inventory to

current liabilities is calculated and which is presented in the following table.

Percent of Inventory over total current liabilities ratio =

Inventory

* 100

Current liabilities

Year Inventory Current liabilities Ratio

2004-2005 13386.80 7862.11 17%

2005-2006 11690.67 8042.62 145%

2006-2007 49950.88 16204.14 308%

2007-2008 42950.66 14876.45 284%

2008-2009 46087.45 17728.22 259%

2009-10 93605.78 36253.41 258%

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INTERPRETATION:

From the above table it can be understand that the 17% of Inventory over current liabilities ration

was showing a declining trend for two years 2004-2005. During the year 2005-2006 the ratio was

it gradually increased to 145 and there is a net increase to the extent of 128. The lowest

Inventory over total amounts ratio was recorded at 14 during the year 2004-2005. The highest

Inventory to current liabilities ratio was recorded at 308 during the year 2006-07. The average

Inventory to current liabilities ration was recorded at 211 during the review period.

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

1 2 3 4 5 6 7

Year

Inventory

Current liabilities

Ratio

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8. CURRENT RATIO:

In order to know the current ratio the percentage of current assets to current liabilities is

calculated and which is presented in the following table.Current assets

Current ratio =

Current liabilities

Year Current assets Current liabilities Ratio

2004-2005 24172.33 7862.11 3.07%

2005-2006 28770.78 8042.62 3.57%

2006-2007 53063.75 16204.14 3.27%

2007-2008 45598.02 14876.45 3.06%

2008-2009 49713.32 17728.22 2.80%

2009-2010 86811.49 36253.41 2.39%

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INTERPRETATION:

From the above table it can be interpreted that the 3.07% of current assets over current liabilities

ratio i.e., current ratio was showing a decreasing trend from year 2005-06. In the year 2004-05

the ratio was 3.07 and has increased to 3.057 in the 2005-06. The lowest current ratio was

recorded at 2009-10 which is 2.39% and the highest ratio was recorded at 3.57 during the year

2005-06. The average current ratio was recorded at 3.02 during the review period.

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

Current assets

Current liabilities

Ratio

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9. QUICK RATIO:

The quick ratio is the relationship between quick to current liabilities quick assets is more

rigorous test of liability position of a firm it is computed by applying the following formula.

Quick ratio= current assets-current liability

Where quick assets = current assets- inventory

Year Quick assets Current liabilities Ratio

2004-2005 10785 7862.11 1.37%

2005-2006 17080 8042.62 2.12%

2006-2007 3112 16204.14 0.02%

2007-2008 3347 14876.45 0.22%

2008-2009 3625 17728.22 0.20%

2009-2010 3207 36253.41 0.08%

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INTERPRETATION:

From the above table it can be understand as that the % of quick assets to current liabilities i.e.,

the quick ratio was 0.002 in 2006-07 and from that year it is showing increasing trend. The

highest quick ratio was 2.12 during the year 2005-06. The average quick ratio was 0.66 during

the review period.

0

5000

10000

15000

20000

25000

30000

35000

40000

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

Quick assets

Current liabilities

Ratio

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CHAPTER – V

FINDINGS

SUGGESTION

CONCLUSION

FINDINGS

There is an increasing trend in investment in inventory.

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

2009-2010.

The inventory conversion period is gradually decreasing year by year because the funds

are unnecessarily tied up.

The average inventory ratio over current asset ratio is showing an increasing trend which

recorded at 80%.

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

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

The inventory turnover ratio is reducing the profit and the liquidity position of the

industry, so proper measures are to be taken to retain the position of the industry.

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SUGGESTIONS

Though the production is higher in the year 2005-06 as per inventory conversion period it

took 272 days. This shows that there is demand for inventory and the funds unnecessarily

tied up. So, proper demand forecasting should be done and according to that it may be

manufactured.

The investment on raw material should be made as per the requirement. Unnecessary

investment may block up the funds.

Neither too high nor too may inventory turnover ratios reduce profit and liquidity

position of the industry. So, proper balance should be made to increase profits and to

ensure liquidity.

The raw material should be acquired from the right source at right quality and at right

cost

The process that was being used by NTPC with the purchasing department should

undergo changes, so that, it seeks enhance the celerity of the delivery of a productwithout compromising its quality by improving the utilization of material, labour and

equipment.

To reduce the work, the purchasing department may enter the purchasing order into a

database and did not send a copy to anyone.

This generally simplifies the process for all concerned. As a result it would able to reduce

the work of its accounts payable department.

CONCLUSIONS

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Over all the inventory of NTPC is up to the mark.

The production of power during 2004-05 was 7,47,436 and 7,77,092 respectively which

is higher as compared to 2007-08 which is 6,87,373 and 7,27,447 respectively.

Investments on raw material are 93605.78 lakhs which very high as compared to 2007-08

which is only 460870.45 lakhs.

The inventory turnover ratio shows that the stock has been converted into sales is only

1.32 times.

In the year 2005-06 the stock was cleared within 28 days where as it took 232 days in the

year 2004-05 which took more days for clearing stock

In this type of process, it requires more number of employees and supplier should also

wait for until the accounts are matched.

This process takes an input, adds value to it and provides an output to an internal or

external customer.

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BIBLIOGRAPHY

LITERATURES:

I.M.PANDEY : FINANCIAL MANAGEMENT

PRASANNA CHANDRA : FINANCIAL MANAGEMENT

S.P. JAIN&K.L.NARANG : FINANCIAL ACCOUNTING &

ANALYSIS

WEBSITES:

WWW.NTPC. CO.IN

WWW.NTPCINDIA.COM

WWW.GOOGLE .COM

http://www.ntpc/

http://www.ntpc/

http://www.ntpcindia.com/



http://www.ntpc/

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