LAL BAHADUR SHASTRI INSTITUE OF

MANAGEMENT

Inventory Planning and Controlling

A STUDY ON INVENTORY MANAGEMENT IN SMELTER

PLANT

With reference to National Aluminum Company Ltd.

Submitted to: Dr. Minakshi Kumari Submitted by :Rahul Raina 503/2018

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 CHAPTER 1: EXECUITVE SUMMARY

Inventory is the most important asset of a manufacturing company like Nalco and the

important resource. There are multiple inventory control techniques like as Reorder point,

EOQ, ABC analysis, XYZ analysis, FSN analysis, HML analysis, VED analysis, JIT

inventory control, Safety stock control and many more. Out of all ones mentioned above, we

have discussed certain techniques that have been used for inventory control in Nalco Smelter

Plant.

Aluminum industry mostly consists of producers and fabricators. Mostly users of aluminum

are sectors like electrical, transportation, building and construction and packing industries.

INDIAN ALUMINIUM INDUSTRY

India’s total share of global aluminum production is mostly around 3 %. The Indian

aluminum industry has mainly only five plants in the country from three different business

groups.

•The Aditya Birla Group: Hindalco Industries Limited (Hindalco)

•Sterlite Industries: Bharat Aluminum Company Limited (Balco), Madras Aluminum

Company Limited (Nalco)

•Public Sector Undertakings: National Aluminum Company Limited (Nalco).

COMPANY PROFILE

NALCO was started in the year1981 with technical collaboration of aluminum Pechiney of

France. The Company showed a record total profit of Rs 1732 crore in 2018-19, which is the

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maximum in a decade and sales turnover of Rs 11386 crore in FY2018-19, which is the

highest since inception. The income through export have been recorded at 4,793 crores, also a

massive growth of 18% over 2017-18. In terms of profitability, NALCO is ahead of its

private sector peers by registering EBIDTA margin of 28 per cent. Currently, Government

holds exactly 51.5% equity of NALCO.

The research conducted in about the inventory control techniques applied in Nalco Smelter

Plant, the Company carried inventory at the lower cost and net realizable value and as at 31st

March 2019 held inventories of ₹1210.01 crore (2017-18 : ₹1194.08 crore). The Company

provides for NPA based on period for which an item remained as non-moving. This method

relied on assumptions made by determining good provisioning to apply in the inventory

balances. As about bulk procurement of raw materials and steel and cement change in

manpower and increase due to spares. The research objective is to study and understand the

effectiveness of various techniques used in Nalco and suggesting methods and strategies to

control the inventory.

INTRODUCTION

NEED FOR INVENTORY

Inventory is of utmost importance to every Company, without inventory no company

would survive. Keeping inventory of enough stocks mostly helps to face lead times

component, demand and supply variations and any unpredicted situations in the procurement

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of materials. It is very necessary to keep a check over inventory to save the company from

NPA of inventories and to avoid any loss.

TYPES OF INVENTORIES

Depending upon the type of the business, mostly the type of Inventories Varies. In a

manufacturing sector the inventory can be classified into three broad categories:

RAW WORK IN FINISHED

MATERIALS PROGRESS GOODS

FACTORS THAT INFLUENCE INVENTORY

“How much and when to buy”. These are the two important things on which an inventory

control depends. Factors that guide these two fundamental things are mentioned below:

1. Requirements

2. The total Lead time

3. Obsolesce.

4. Produce to stock

5. Or Produce to order

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 INVENTORY CONTROL TECHNIQUES

Inventory has been maintained as a cushion in the supply of raw materials for the continuous

production without causing any stock out situation. The following techniques are mostly

being used in the control of inventory.

1. Inventory Management Techniques

2. Standardization

3. Selective Inventory Control

4. Just In Time

5. Perpetual inventory system

6. Inventory turnover ratio

OBJECTIVES OF THIS PROJECT

 To understand and analyze the inventory of various raw materials, fuel and finished

goods.

 To understand the selective inventory control techniques such as ABC, XYZ analysis

that are used by NALCO

 To calculate the EOQ of all the raw materials used by the company and analyze it.

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  To find the total cost of the inventory to recommend methods and strategies to control

the inventory

DATA COLLECTION TECHNIQUES

I have collected both primary and secondary data for the research objective.

Data collection technique used here for the collection of primary data is the annual balance

sheet of the company.

The secondary data are mostly collected from stores record, news articles, journals, multiple

websites, books etc.

ANALYSIS & INTERPRETATION OF DATA

7.1 INVENTORY OF MATERIALS

a) RAW MATERIALS (RS IN CRORES)

Materials 31.03.17 31.03.18 31.03.19

Aluminum 39.31 50.69 60.05

Fluoride
Caustic Soda 536.39 585.26 677.30
Calcined Petroleum 282.48 302.64 269.47

Coke
Coal Tar Pitch 109.98 94.97 101.13

Lime 36.83 41.03 44.45

Others 26.60 29.81 29.39

Total 1031.59 1104.4 1081.79

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 Chart Title

Total

Others

Lime

Coal Tar Pitch

Calcined Petroleum Coke
Caustic Soda

Aluminium Fluoride
0 500 1000 1500 2000 2500 3000 3500

31.03.17 31.03.18 31.03.19

INTERPRETATION:

Inventory of raw material increased from Rs1031.59 crores in 31.03.17 to Rs1081.79 crores in

31.03.19. Production has decreased from 358954 MT in the year 31.03.17 to 358734 MT in

31.03.19 which caused the raw materials to accumulate.

Inventory of raw materials decreased from Rs 1104.4 crores in 31.03.18 to Rs 1081.79 crores.

This happened due to an increase in production from 358734 MT in 31.03.18 to 360457 MT

in 31.03.19 which led to decrease in stock of raw materials. The decrease in stock is also

because of proper flow of raw materials from suppliers to stores and stores to production

houses. This simply shows the improvement in planning of utilization of raw materials.

b) STOCK OF FUEL (RS IN CRORES)

Materials 31.03.17 31.03.18 31.03.19

H.F.O 17.92 16.27 30.12
L.D.O 2.73 1.73 0.91
Total 20.65 18 31.03

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 Total inventory of fuel
35

30

25

20

15

10

0
H.F.O L.D.O Total

31.03.06 31.03.07 31.03.08

INTERPRETATION:

Fuel is an important material which is used in the production process and is very important to

control it, else it can lead to multiple variations in the inventory. Inventory of fuel here has

decreased from Rs 20.65 crores in 31.03.17 to Rs 18 crores in 31.03.19, We can see that the

inventory of fuel has clearly increased by almost 72.39% in 31.03.19. This shows increase in

the prices of fuel and increase in production also, the increase is huge, and my

recommendation is that the company should check on the proper consumption and storage of

the fuel.

STOCK OF FINISHED GOODS AND INTERMEDIATARY GOODS (RS IN

CRORES)

Materials 31.03.06 31.03.07 31.03.08

Calcined Alumina 46.98 43.93 46.51
Special Grade 1.02 0.11 1.44

Alumina
Aluminum Standard 19.00 8.82 9.92

and Sow ingots

Aluminium wire 2.29 2.33 1.05

rods

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 Aluminium billets 3.68 1.08 3.23
Aluminium strips 5.80 1.58 1.93
Rolled products 10.20 14.02 10.59
Anodes 55.58 71.03 73.46
Anode butts 2.12 1.46 2.05
Aluminium scraps 6.51 0.84 7.90
WIP 70.33 71.70 81.48
Total 223.51 216.9 239.56
Total
WIP
Aluminium scraps
Anode butts
Anodes
Rolled products
Aluminium strips
Aluminium billets
Aluminium wire rods
Aluminium Standard and Sow ingots
Special Grade Alumina
Calcined Alumina
0 100 200 300 400 500 600 700 800

31.03.06 31.03.07 31.03.08

Here we can see that the total inventory of the finished goods has declined from Rs 223.51

crores in the FY 31.03.17 to that Rs 216.90 in the FY 31.03.19 .This decline is mostly

because of an increase in the sales in the year 2019. The inventory has increased from Rs

16.90 crores in 31.03.18 to Rs 239.56 crores in 31.03.19 due to a decline in sales in FY: 18 :

19. The company should definitely produce goods according to their demand and they

should also decrease the cost of goods for greater sales.

SELECTIVE INVENTORY CONTROL

 It is done to identify items which might bring visible profit by proper management

from the thousands of products managed by the organization.

 It is also done to find out the relevance of the items and thus allows different levels of

control based on the importance of all the products.

a) ABC ANALYSIS

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This analysis done on the basis of annual consumption value.

Nalco’s ABC classification for the year FY: 18 19 is shown below:

ABC Class Criteria No. of Materials Cumulative

Consumption

Value
A 70%ofconsumptionvalu 219 75.25

e
B 20%ofconsumptionvalu 937 21.54

e
C 10%ofconsumptionvalu 9080 10.76

e
Total 10236 107.56

 Class A items having approx 70% consumption value and 219 items worth Rs 75.25

crores. These items are required to be ordered frequently to reduce the capital stored

up in inventory. They should also try having low safety stocks and take strict control.

These items should be handled by senior management.

 Class B products have items with 20% of consumption value that includes 937 items

with value Rs 21.54 crores. These products require periodic stock up and have

moderate safety stock. They need moderate control and can be handled by assigned

team.

 Class C products having criteria 10% of consumption value and includes nearly 9080

items with value of Rs 10.76 crores. These products require exceptional follow up and

high safety stock and require lose control thus can be handled by anyone on the team.

b) XYZ ANALYSIS

XYZ classification is based on the value of inventory kept in stores.

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Nalco’s XYZ classification of inventory is tabulated below:

XYZ Class Criteria Total no. of Closing stock Cumulative

Materials value Consumption

value
X 70% of stock 1385 71.29 57.32

value
Y 20% of stock 3272 20.37 86.95

value
Z 10% of stock 38936 101.87 513.62

value
Total 43593 1018.60 1173.82

 Class X, products that have a criteria 70% of the stock value consists of 1385 products

with closing stock value of Rs 71.29 crores and consumption value Rs 57.32 crores.

These products are very high value products and should be taken special care of.

 Class Y, products having the criteria 20% of the stock value consists of 3272 products

with closing stock value of Rs 20.37 Crores and consumption value Rs 86.95 crores.

These products are of moderate importance products and thus require moderate care.

 Class Z, Products having criteria 10% of the stock value consists of around 38936

products with closing stock value of Rs 101.87 crores and consumption value of Rs

513.62 crores. We can say that these items are low value items and require low care.

ECONOMIC ORDER QUANTITY OFRAW MATERIALS AND FUEL

Economic Order Quantity is given by the formula:

2 AO
EOQ =
√ C

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 And the total cost of inventory is given by the formula:

Total cost of inventory = (A×P) + (A×O) + (EOQ×C)

EOQ 2

Where A = Annual consumption (in units)

O = Ordering cost per order (in Rs)

C = Carrying cost per unit (in Rs)

P = Price per unit (in Rs)

1. EOQ OF Heavy fuel oil

Annual consumption 29087 KL

Cost per unit Rs 20.14
Carrying cost per unit Rs 0.14
Ordering cost per order Rs 3500
Economic order quantity 1205.96 KL

Units ordered(in Carrying cost(in Ordering cost(in Total cost(in

KL) Rs) Rs) Rs)

500 35000 203609 586050789
600 42000 169674.1667 586023854.2
700 49000 145435 586006615
800 56000 127255.625 585995435.6
900 63000 113116.1111 585988296.1
1000 70000 101804.5 585983984.5
1100 77000 92549.54545 585981729.5
1200 84000 84837.08333 585981017.1
1300 91000 78311.15385 585981491.2
1400 98000 72717.5 585982897.5
1500 105000 67869.66667 585985049.7

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INTERPRETATION:

EOQ of the heavy fuel oil after calculating came out to be 1205.96 KL.

The the quantity to be ordered is varied to the total cost of inventory which is greater

than the total cost of inventory only if economic order quantity is ordered i.e. Rs

585981017.1

2. EOQ OF ALUMINIUM FLUORIDE (INDIGENOUS)

Annual consumption 5978.1 MT

Cost per unit Rs 61.43
Carrying cost per unit Rs 1.94
Ordering cost per order Rs 3500
Economic order quantity 146.87 MT

Units ordered(in Carrying cost(in Ordering cost(in Total cost(in

MT) Rs) Rs) Rs)

140 135800 149452.5 367519935.5
141 136770 148392.5532 367519845.6
142 137740 147347.5352 367519770.5
143 138710 146317.1329 367519710.1
144 139680 145301.0417 367519664
145 140650 144298.9655 367519632
146 141620 143310.6164 367519613.6
147 142590 142335.7143 367519608.7
148 143560 141373.9865 367519617
149 144530 140425.1678 367519638.2
150 145500 139489 367519672

INTERPRETATION:

Here the EOQ of Aluminium fluoride after calculation is found out be 146.87 MT.

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At EOQ the total cost of the inventory is calculated to be Rs. 367519608.7 which is

comparitively less when compared to total cost calculated at different order quantity.

3. EOQ OF MAGNESIUM METAL

Annual consumption 77.56 MT

Cost per unit Rs 105.6
Carrying cost per unit Rs 16.17
Ordering cost per order Rs 3500
Economic order quantity 5.7 MT

Units ordered(in Carrying cost(in Ordering cost(in Total cost(in

MT) Rs) Rs) Rs)

1 8085 271460 8469881
2 16170 135730 8342236
3 24255 90486.66667 8305077.667
4 32340 67865 8290541
5 40425 54292 8285053
6 48510 45243.33333 8284089.333
7 56595 38780 8285711
8 64680 33932.5 8288948.5
9 72765 30162.22222 8293263.222
10 80850 27146 8298332

INTERPRETATION:

EOQ of Magnesium metal is calculated here to be 5.7 MT.

The total cost of inventory at economic order quantity is calculated to be Rs.

8284089.33 which is way less when compared to total cost that is calculated at different

order quantity.

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 EOQ OF PIG IRON

Annual consumption 926.11 MT

Cost per unit Rs 20.24
Carrying cost per unit Rs 0.74
Ordering cost per order Rs 3500
Economic order quantity 93.60 MT

Units ordered(in Carrying cost(in Ordering cost(in Total cost(in

MT) Rs) Rs) Rs)

90 33300 36015.38889 18813781.79
91 33670 35619.61538 18813756.02
92 34040 35232.44565 18813738.85
93 34410 34853.60215 18813730
94 34780 34482.81915 18813729.22
95 35150 34119.84211 18813736.24
96 35520 33764.42708 18813750.83
97 35890 33416.34021 18813772.74
98 36260 33075.35714 18813801.76
99 36630 32741.26263 18813837.66
100 37000 32413.85 18813880.25

INTERPRETATION:

EOQ of Pig Iron has been calculated to be 93.60 MT.

Here the total cost of inventory at economic order quantity is calculated to be Rs.

18813729.22 which is way less when compared to total cost calculated at different

order quantity.

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RECOMMENDATIONS

Here are some of the suggestions I would like to give:

1. Planning committee

The number of competitors has clearly increased and some of them have started to

produce aluminum at a cost lower than that of Nalco. In order to maintain its place in the

aluminum industry as a leader and producing the lowest cost aluminum a dedicated

committee which is responsible for making proper planning and different strategies

should be formed for the procurement of raw materials that keeps in mind the inventory.

2. Proper planning

From the project I assume that inventory in FY18 had increased due to multiple

macroeconomic factors. Better demand forecasting should be done. Its clear that

maintaining low inventory and supplying right amount of materials for production is

extremely important if not wanting to face any losses.

3. Making better use of Selective Inventory control Techniques

As we know that through selective inventory control techniques stores can dispose the

NPA that just increase the inventory, but this process does not eliminate all the

nonmoving products. So, I suggest that selective control techniques should be better

used so that at least most of the nonmoving items are disposed off immediately. Other

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 selective control techniques such as VED can also be used which they have not been

using so far.

4. Improving the inventory control techniques for spares

Spares materials like as mechanical, electronic spares are the generally the materials

that are one of the prime reasons behind high inventory as these are either very slow

moving or nonmoving products. Therefore, inventory control techniques should be

used for spares as well.

5. Transfer of stock

There are certain products that are required by different departments within the

organization. If suppose one of the departments exhaust the product, the stock should

be able to get refilled by transfer from some other department having surplus of the

same products.

6. Introducing SAP and ERP technology

SAP software generally provide easier maintenance of the entire data and records

through the internal panel control. New technologies can provide easy accessibility to

the person in charge to keep a check on the record of data of the inventory and other

things to help follow better inventory management.

7. Using EOQ model for procurement of raw materials

The company here places orders for the raw materials every month. This definitely

increases the total cost of inventory. Therefore, my suggestion is that the company

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should use EOQ model for procurement of raw materials as this provide right level of

inventory with minimum cost.

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