inventory management in power industry

ABSTRACT WHAT IS INVENTORY MANAGEMENT? Inventory management is usually not the direct operating responsibility of the finance manager, the investment of funds in inventory is a very important aspect of financial management. A proper planning of purchasing, handling, storing and accounting should from a part of inventory management. Efficient systems of inventory management will determine.  What to purchase?  How much to purchase?  From where to purchase?  Where to store? Etc… The term inventory refers to the stock of the product a company is manufacturing for sales and components that make up the product. In other words inventory is composed of assets that will be showed in future in the normal course of business operations. The various forms in which inventories exist in a manufacturing company are:  Raw materials  Work in progress(semi finished goods)  Finished goods The purpose of inventory management is to keep the stocks in such a way that neither there is over-stocking, the over-stocking will mean a reduction of liquidity of other production processes. Under-stocking will result in stoppage of work.

1

OBJECTIVES: Primary objective:  To study various inventory control measures. Secondary objective:  To study the store analysis between the years of 2003-2009  To study the usage of coal, furnace oil, high speed oil in Dr.NTTPS.  To study the reasons for the shortage of coal.  To review the ABC analysis and understand the impact of business on inventory. PROPOSED METHODOLOGY: The sources of data collection will be  Primary source – The data has been gathered through interactions and

discussions with the executives working in the division. Some important information has been gathered through couple of unstructured interviews of executive.  Secondary source – Referred standards texts and reference books for

collecting the information regarding the theoretical aspects, of the topic. And annual reports and other magazines published by the company are used for collecting the required information. LIMITATIONS OF THE STUDY: • The study covers a period of five years from 2003-04 to 2007-08. • The study does not cover the all inventory control techiniques and procedures. •

The study based on primary and secondary information.

• The study related to Dr.NTTPS only which is a unit of APGENCO.

2

REVIEW OF LITERATURE Schwartz (2008), Studies the business of NAILD distributor through this article. The NAILD is an organisation supporting lighting distributors in the US with publications, training, and conferences. According to him, recent changes and trends in the lighting market provide new opportunities. The keys to taking advantage of the opportunities is to understand the market, know updates

to

your

customers,

where and

to

get

more

information,

provide

turn information into active marketing and

promotional efforts. The Energy Independence and Security Act of 2007 add to the programs and efforts introduced in EPACT 2005. A key component of the ENERGY STAR qualified light fixtures program is the Advanced Lighting Package (ALP). As market trends and legislation move purchasers away from inefficient technologies and towards energy-efficient products, NAILD distributors that become ENERGY STAR Partners have an opportunity to increase sales and profits. Sreekumar (2008) reviews the market-oriented power sector reforms initiated in India in the early 1990s. It brings out a public interest oriented critique of the three phases of the reforms—firstly, privatization of generation, secondly, state sector restructuring and finally, the ongoing reforms since the passage of the Electricity Act 2003. Reforms were taken up as a response to the crisis in the sector. The article questions the success of the process in solving the

crisis. While

acknowledging

positive elements like increase in transparency and participation, it criticizes the process for neglect of development issues like rural electrification and energy efficiency. The article concludes with some thoughts on developing an alternate reform approach. Augustine (2007), tries to put forth a model pertaining to transportation because India is facing a huge increase in power consumption. The model is done with an aid of GAMS (General Algebraic Modelling System). The power sector represented in the model by production 3

capacities,

cost

of production

is and

transmission, demand for power and the distances between power plants and consumption centres. The author has considered major power generating areas of the country like Ranchi, Bhopal, bhubwaneshwar, dhanbad, Vishakhapatnam etc. The model described is very realistic, scalable and easy to implement, but has only considered coal, hydroelectric and natural gas technologies. It can be expanded to include other technologies and also can be made dynamic to provide solutions for different time periods representing the maturing of the power generation plants during the duration of the model.

4

INDUSTRIAL PROFILE Electricity is the most essential form of energy. Today it has become an absolute necessary that life would come to virtual standstill in the absence of it. Electricity is a virtual need for development of industry, agricultural and commerce. The extent to which is has permitted a society is an indicator of the quality of life its people. Due to industrial revolution all the developed countries achieved surplus power generation and improved the quality of life. The development in usage of electricity is measured in terms of per capital consumption of that country. India is fastly emerging in the power generating sector. India has power generating capacity of 99310MW, which is the 85% of the total generation in the south asia.Hence India is in a good position in the power generating sector. The overall generation has increased from 287 billion units in 1991-92 to 89,450MW in 2004-05. In India, Electricity ratio was 3.06 in the plan peaked at5.11 during the third plan and come down to 1.65 in eighties. For the nineties, a ratio of around 1.5 is projected. Therefore, in order to support a rate of growth of GDP of around 7% per annum, the rate of growth supply needs to be over 10% annually. The power generation in India was mainly done by four types of different stations. These four stations are given below. They are: 1. Thermal stations 2. Hydel stations

3. Nuclear stations 4. Wind stations THERMAL STATIONS Coal is the major raw material for generating power by these thermal stations. As coal is the main resource for generating power, 36% of annual energy is produced by coal. The contribution of these thermal towards the overall generation is about 82% as per records of 2007-08.Power generated by these stations was about 70,058.71MW out of 80,777.45 5

MW throughout India. So we can say these thermal stations are playing vital role in the generation of power. HYDEL STATIONS As our India is full of water resources, these were a number of hydel stations were constructed throughout India. The percentage of contribution by these stations to that of total generation was about 15% as per records of 2007-08.The power generated by these stations was about 3678.86MW out of the country’s total generation of 30335.25MW in the year 2007-08. WIND STATIONS These wind stations have brought a revolutionary change in the power generating sector. India is the third largest producer of wind energy in the world after only to Europe and USA. The potential of installing these types of wind stations in India is about 45000MW. In the next 20 years there is a possibility of getting 10,000MW, which is the 10% of total generation in India. NUCLEAR STATIONS These nuclear stations were not so much constructed as estimated earlier. Because these may arise some environmental problems by constructing those stations. So our Indian government decided to decrease these types of power plants. So finally I am going to conclude that the power generation in India has bright future. India is currently generating 89,450MW of power according to the estimates of central electricity. India requires an additional 1,40,000 MW at an estimated to meet power requirement over next 15years.

6

ORGANISATIONAL CHART OF APGENCO

Figure 0-1

State Government appoints the Chairman & Managing Director (CMD) and other Directors for a period of three years. The CMD is the head of the organization. The head quarter of APGENCO is situated at Hyderabad and CMD and other directors will be situated from board employees only who will be normally retired Chief Engineers.

7

ALL PUBLIC THERMAL POWER STATIONS IN ANDHRA PRADESH Dr.Narla TATA RAO THERMAL POWER STATION Table 0-1

NAME &

STAGE

ADDRESS

/STATIONS

DR NTTPS

DATE OF UNITS

CAPACITY(MW)

COMMENCING

I

1

210

01-11-1979

I

2

210

10-10-1980

II

3

210

05-10-1989

II

4

210

23-08-1990

III

5

210

31-03-1994

III

6

210

24-02-1995

IBRAHIMPATNAM VIJAYAWADA Krishna(dt)-521456

*Sources from the industry records 8

RAYALASEEMA THERMAL POWER STATION Table 0-2

NAME &

STAGE

ADDRESS

/STATIONS

RTTP Cuddapah

DATE OF UNITS

CAPACITY(MW)

COMMENCING

I

1

210

31-03-1994

I

2

210

25-02-1995

II

3

210

25-01-2007

V.V.Reddy Nagar Cuddapah(dt)-516312 TOTAL

630

*Sources from the industry records RAMAGUNDAM THERMAL POWER STATION Table 0-3

NAME &

STAGE

ADDRESS

/STATIONS

DATE OF UNITS

CAPACITY(MW)

TOTAL 62.5 *Sources from the industry records

9

COMMENCING

KOTHAGUDEM THERMAL POWER STATION Table 0-4

NAME & ADDRESS

KTPS Paloncha Kothagudem,Khammam District-507115

DATE OF

STAGE

UNITS

CAPACITY(MW)

A

1

60

A

2

60

04-07-1966

A

3

60

27-11-1966

A

4

60

27-05-1967

B

5

120

13-08-1974

B

6

120

19-12-1974

C

7

110

10-03-1977

C

8

110

10-01-1978

C

9

250

27-03-1997

C

10

250

28-02-1998

/STATIONS

TOTAL

1200 *Sources from the industry records

10

COMMENCING

08-07-1967

TOTAL CAPACITY OF THE THERMAL STATIONS Table 0-5

STATIONS/STAGES VTPS RTPP KTPS RTSB TOTAL

CAPACITY 1260 630 1200 62.5 3152.5 *Sources from the company records

GRAPHICAL REPRESENTATION OF THE CAPACITIES IN THERMAL STATIONS

Figure 0-2

*Sources from the company records

11

ANDHRA PRADESH POWER GENERATING CORPORATION LIMITED (APGENCO) The Andhra Pradesh state electricity board (APSEB) was set up in April, 1959 as a statutory corporation with the objectives of promoting co-ordinate development of generation, supply and distribution of electricity in an efficient & economic manner. Exacting A.P.ELECTRICITY REFORM ACT 1948, as two corporations via structured the APSEB. 1. Transmission Corporation of Andhra Pradesh ltd(APTRANSCO) 2. Power Generation Corporation of Andhra Pradesh ltd(APGENCO)

Under the provisions of companies act, 1956 and which came into existence from 1-2-1999. APGENCO is the government organized power generating corporation in Andhra Pradesh. This is the third largest power utility in the country. APGENCO is generating power through three type of stations. They are 1. Thermal stations 2. Hydel stations 3. Wind stations APGENCO’s Hydel station installed capacity is the second highest in the country.

12

PORTERS 5 FORCES MODEL Introduction The model of the Five Competitive Forces was developed by Michael E. Porter in his book „Competitive Strategy: Techniques for Analyzing Industries and Competitors“in 1980. Since that time it has become an important tool for analyzing an organizations industry structure in strategic processes. Porters model is based on the insight that a corporate strategy should meet the opportunities and threats in the organizations external environment. Especially, competitive strategy should base on and understanding of industry structures and the way they change. Porter has identified five competitive forces that shape every industry and every market. These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. The objective of corporate strategy should be to modify these competitive forces in a way that improves the position of the organization. Porters model supports analysis of the driving forces in an industry. Based on the information derived from the Five Forces Analysis, management can decide how to influence or to exploit particular characteristics of their industry.

13

The Five Competitive Forces are typically described as follows:

Figure 0-3

1

Bargaining Power of Suppliers The term 'suppliers' comprises all sources for inputs that are needed in order to

provide goods or services. Supplier bargaining power is likely to be high when:

14

 The market is dominated by a few large suppliers rather than a fragmented source of supply  There are no substitutes for the particular input  The suppliers customers are fragmented, so their bargaining power is low  The switching costs from one supplier to another are high  There is the possibility of the supplier integrating forwards in order to obtain higher prices and margins. This threat is especially high when buying industry has a higher profitability than the supplying industry, In such situations, the buying industry often faces a high pressure on margins from their suppliers. The relationship to powerful suppliers can potentially reduce strategic options for the organization. 2

Bargaining Power of Customers

Similarly, the bargaining power of customers determines how much customers can impose pressure on margins and volumes. Customers bargaining power is likely to be high when  They buy large volumes, there is a concentration of buyers  The supplying industry comprises a large number of small operators  The supplying industry operates with high fixed costs  The product is undifferentiated and can be replaces by substitutes  Switching to an alternative product is relatively simple and is not related to high costs  Customers have low margins and are price-sensitive 15

 Customers could produce the product themselves  The product is not of strategically importance for the customer  The customer knows about the production costs of the product  There is the possibility for the customer integrating backwards.

3

Threat of New Entrants The competition in an industry will be the higher, the easier it is for other

companies to enter this industry. In such a situation, new entrants could change major determinants of the market environment (e.g. market shares, prices, customer loyalty) at any time. There is always a latent pressure for reaction and adjustment for existing players in this industry. The threat of new entries will depend on the extent to which there are barriers to entry. These are typically  Economies of scale (minimum size requirements for profitable operations)  High initial investments and fixed costs  Cost advantages of existing players due to experience curve effects of operation with fully depreciated assets  Protected intellectual property like patents, licenses etc  Scarcity of important resources, e.g. qualified expert staff

16

 Access to raw materials is controlled by existing players  Distribution channels are controlled by existing players  Existing players have close customer relations, e.g. from long-term service

contracts  High switching costs for customers  Legislation and government action

4

Threat of Substitutes

A threat from substitutes exists if there are alternative products with lower prices of better performance parameters for the same purpose. They could potentially attract a significant proportion of market volume and hence reduce the potential sales volume for existing players. This category also relates to complementary products. Similarly to the threat of new entrants, the threat of substitutes is determined by factors like  Brand loyalty of customers  Close customer relationships  Switching costs for customers

17

 The relative price for performance of substitutes

 Current trends. 5

Competitive Rivalry between Existing Players This force describes the intensity of competition between existing players

(companies) in an industry. High competitive pressure results in pressure on prices, margins, and hence, on profitability for every single company in the industry. Competition between existing players is likely to be high when  There are many players of about the same size

 Players have similar strategies  There is not much differentiation between players and their products, hence, there is much price competition  Low market growth rates (growth of a particular company is possible only at

the expense of a competitor)  Barriers for exit are high (e.g. expensive and highly specialized equipment).

COMPANY PROFILE INTRODUCTION TO Dr.Narla TATA RAO THERMAL POWER STATION (DR NTTPS) MISSION; The mission of Dr.NTTPS is generation of electrical energy at lowest possible rates by utilizing available resources i.e., coal, furnace oil and water in optimum way. Maintaining high plant load factor i.e., with minimum shutdowns low specific oil

18

consumption. Supply of electric power to its consumers with in the specified limits of voltage and frequency without interruptions at cheaper rates.  To

spread ahead the accelerated power development by planning and

implementing new power projects.  To generate adequate and reliable power most economically, efficiently and ecofriendly.  To implement Renovation and Modernization of all existing units and enhance their performance. VISION To be the best power utility in the country and one of the best in the world. CORE VALUES  Excellence in all aspects of the company  Honesty, integrity and ethical business  Peoples as the source of strength  Respect for the individual and personal growth  Tackling challenges and solving problems  Continued self-improvement , never being satisfied

OBJECTIVES  To operate and maintain power station at high availability ensuring minimum cost of generation 19

 To build leadership through professional excellence and quality  To build a team based organization by sharing knowledge and empowering employee  To treat everyone with personal attention , openness , honesty and respect they deserve  To break down all departmental barriers for working together Dr.NTTPS is one of the powers generating station of “ANDHRA PRADESH POWER GENERATING CORPORATION (APGENCO)” and is considered to be the best one in the country’s thermal power generating stations.Dr.NTTPS is located on the left bank river of “KRISHNA” with a distance of 2km and is in between Ibrahimpatnam and kondapalli villages and 12km of the north side of Vijayawada city in Krishna Dist. The site lies at an elevation of about 26.5 mts above the means of sea level. Dr.NTTPS complex consists of 3 stages and the details are as follows: Table 0-6

STAGE

UNITS

CAPACITY(MW)

DATE

OF

Stage-1

Unit-1

210

INSTALLATION 01-11-1979

Stage-II

Unit-2 Unit-3

210 210

10-10-1980 05-10-1989

Stage-III

Unit-4 Unit-5

210 210

23-08-1990 31-03-1994

Unit-6

210 1260

24-02-1995

TOTAL

As Dr.NTTPS needs regular water supply for the generation of thermal power, the largest reservoir by Prakasam Barrage regularly supplies water in an efficient way for the production of thermal power and also for other requirements for the plant. The Dr.NTTPS organization had taken a very good decision regarding the construction of 20

cooling towers for recycling of water for producing power generation. These cooling towers were constructed by taking the view that, there is possibility of decrease in the water level at barrage at nearby further and thus they may not get generation of power efficiently. The running cost in thermal power station is compared to other generating systems. Hence the cost per unit generated plays an important role in state economy. Originally the Dr.NTTPS is linked with Talcher fields in Orissa for the supply of coal. The average distance of Talcher coal field by train is 950km but sometimes it will get coal from Singareni collieries company ltd to meet the exigencies and to reach the demand. The average distance of SCCL coal fields by train is about 250km. As such Dr.NTTPS has been selected for study.The station has been turning out sterling performance every year. It stood first in the country during 1994-95, 1995-96, 1996-97, 1997-98 and 2001-02 by achieving the highest plant load factor. The station has been the recipient of many prestigious awards from various organizations including Meritorious Awards instituted by the Government of India. The station has received meritorious productivity award for twenty consecutive years and also got the incentive award for eleven consecutive years. The station has bagged Gold Medal for 2002-03, 9th time in a row since 1994-95.

PROCESS OF POWER GENERATION IN DR.NTTPS: The general layout of a thermal plant for generation of power will be as follows:

21

Figure 0-4

The generation of electric power is carried over in four major steps.

22

1. Receiving of coal at coal handling plant and sending it to mills. 2. Producing steam from water by burning coal in the boiler. 3. Passage of steam to the turbine thus converting heat energy to mechanical energy. 4. The mechanical energy gets converted into electrical energy with the help of generators. As coal is the major raw material, it is mostly supplied by trains. Nearly 3200 tons of coal is required for producing of units per day. The coal obtained from the wagons is tripled on to the conveyor belts. Powerful magnets are arranged on the both sides of these belts to separate the iron particles if any in the coal. This coal is sent to coal bunkers and a part of it is sent to the stockyard for future use. Coal is crushed to minimum size of 2025 mm. Next it is sent to the mills to pulverize it into fine powder. The fitness of the coal thus obtained is 75% pure. This coal used in plants contains 60% ash. This pulverized power is sent to the furnace by using primary air fans which supply hot air. Air from the atmosphere is taken and is passed through air pre heater (APH). This air is sent to P.A fans to pass the powder to the furnace. The coal bunkers and mills are located in between the boiler house and the boiler. Thus turbine house is completely isolated from the mills to ensure dust free atmosphere in the turbine house and also to ensure accessibility of mills for maintenance. In Dr.NTTPS each unit has 6 mills to supply powered coal to boiler. Mills here are direct fixed tube mills, which can run for a very long time period without stopping. Coal obtained from mills is held in suspension in the boiler. Oil is used for ignition and stabilization of the flame. Next, coal is burnt in suspension and air necessary for combustion is supplied by force draft fans. Air from these fans is preheated to minimize heat transfer from the furnace to air.

23

Heat developed through by burning coal is absorbed by water, which is passing through the water walls arranged on the outer surface of the boiler. In order to prevent the flame from touching the walls of the boiler negative pressure is maintained inside the boiler (nearly 10mm of water volume). This is achieved by absorbing air using I.D fans and F.D fans. During combustion of coal few gases and light ash particles move towards the top of the furnace. Heavier ashes particles however settle at the bottom place called bottom ash hopper and it is mixed with pressurized water and carefully disposed. The few gases have very high temperature. So, they will be used to heat steam coming from the end of HPT by using the economizers. By absorbing heat water is converted into saturated steam which is mixture of liquid and vapor. This is again passed back to drum located at a height of 56 mts to separate water and steam. Thus the steam obtained is passed through super heated system. Steam in super heated condition is sent to HPT by two horizontal pipes. There are 3 turbines which run on the same shaft. Circumferential arrangement of movable blades is called a stage. Fixed blades are used to expand the steam and rotate the shaft. HPT is a single flow turbine where as the other two are double flow turbines. Steam at 540 degrees, 130 kg/Cm2

pressure is passed to HPT and rotates to turbine thus converting

heat energy into mechanical energy. By the end of HPT steam is the parameter 340 degrees, 36 kg/cm2 pressure. This is sent back to boiler to raise temperature to 540 degrees which is achieved by heat transfer from the flue gases to incoming steam. This system is passed through IPT & LPT and finally reaches condenser. To avoid the escape of steam from the turbines steam from outside is supplied into the turbine in opposite direction & is removed from other side. Steam is collected from secondary use is called “ Extraction steam by bleed steam”.

24

CONDENSATE SYSTEM: To send steam from LPT to condenser low pressure i.e., almost vacuum should be created in condenser which is done with main air ejector (MAE) which condensate flows MAE temperature of air is transferred to liquid to raise its temperatures slightly to say 46 degrees. After passing through several stages air to reaches LPH. Here the temperature of the condensate is raised with the help of extraction steam. Finally this steam is condensed to water is given back to condenser. Air which is absorbed by the condensate is removed with the help of aerator by the time condensate reaches outlet of DA temperature will be 160 degrees and pressure is 7.6 kg/cm2. FEED WATER SYSTEM The condensate at the outlet of dais fed to BFP to raise its pressure to 170 kg/cm2. Next it is passed through MPH to raise its temperature. This is obtained by passing extraction steam from HPT to LPT. At the outlet of economizer the temperature would be 280 degrees. This steam from outlet of director to the economizer is called feed water system. POWER TRANSMISSION There are 18-220KV outlet feeders from this plant. Power generated at 15KV is stepped up to 220KV and is transmitted. Again it is stepped down to 11KV and is sent to distribution transformer from where it its distributed. Dr.NTTPS from a grid with other power stations like RTS, KTPS and srisailam and in case of emergency power is drawn from any of these stations. All the out feeders can also function as drawing lines when we want power from the other stations.

25

DEPARTMENTATION AND ADMINISTRATION Keeping in mind the various functions carried plant is divided into 18 systems, which are as follows 1. Coal handling system 2. Fuel oil handling system 3. Cooling water system 4. Water treatment system 5. Combustion air system 6. Air fuel gas system 7. Pulverization system 8. Ash handling system 9. Ash disposal system 10. Governor system 11. Lubricant oil system 12. Condensate system 13. Excitation system 14. Auto voltage regulating system 15. Seal oil system 16. Vacuum system 17. Generator cooling system

26

18. Transmission system SAFETY AND HEALTH MEASURES APGENCO developed safety and healthy standards based on Factories Act 1947, Workmen compensation Act and other Health and safety Acts of UK and USA and safety measures are being implemented.

ISO 14001 CERTIFICATION APGENCO is in the process of being certified for ISO 14001 Environment Management systems in a phased manner at Dr.Narla Tata Rao Thermal power Station. ORGANIZATIONAL CHART OF NTTPS

27

Figure 0-5

LEGEND FOR ORGANIZATION CHART C.E S.E (Stage-I, II&III)

: Chief Engineer : Superintending Engineer

28

S.E (Adm&MM)

: Superintending Engineer (Administration Material Maintenance)

D.E (BM)

: Divisional Engineer (Boiler Maintenance)

D.E(TM)

: Divisional Engineer (Turbine Maintenance)

D.E (EM)

: Divisional Engineer (Turbine Maintenance)

D.E (I&C)

: Divisional Engineer (Turbine Maintenance)

D.E (CAM)

: Divisional Engineer (Common Aux. Maintenance)

D.E (MM)

: Divisional Engineer (Mechanical Maintenance)

D.E (Purchase)

: Divisional Engineer (purchase)

E.E.

: Executive Engineer

ADE

: Asst. Divisional Engineer

AE

: Assistant Engineer

Sub. Engineer

: Sub Engineer

OFFICE ESST.

: Office Establishment

SAO

: Senior Accounts Officer

AO

: Accounts Officer

JAO

: Junior Accounts Officer

FM

: Foreman

PA

: Plant Attendant

JPA

: Junior Plant Attendant

QUALITY POLICY 29

VTPS recognizes its importance in the State power Grid and is committed to operate and maintain the power station at high plant availability factor with reliability ensuring minimum cost of Generation by optimizing the resources in an environment friendly manner. Dr.NTTPS is committed to Endeavor to continually improve the competence of employees and quality management system and strive for safe working practices to ensure minimum occupational health. QUALITY OBJECTIVES  To achieve status of one of the best power stations in India by 2006 on the basis of performance.  Continuously monitor the generating process to ensure compliance with the specified requirement of gird efficiently and economically.  Ensure safety dependability and reliability of the electricity generation process in an environmentally sustained manner.  Continuous improvement in process\system thought up gradation of Technology

and skills Knowledge of the employees by organizing regular training courses.  To achieve Auxiliary Consumption of less than 9.0% by 2006-07.

SWOT ANALYSIS

30

Figure 0-6

STRENGHTS AND OPPORTUNITIES OF POWER SECTOR:  Well established and vast transmission and distribution network.  Highly qualified engineering and technical personnel.  Regulatory framework is further facilitated with enactment of Electricity Bill, 2003.  The Electricity Bill, 2003 holds promises forth power sector and certainly for the consumer by way of competition reliability and rationalized tariff structure.

31

 Emergence of strong and globally comparable central utilities (NTPC, POWER GRID).  India has substantial non-conventional energy resource base and technologies to meet growing power requirements by tapping this energy. WEAKNESSES AND THREATS TO POWER SECTOR:  Poor infrastructure has led to heavy T&D losses. Old and poor transmission and distribution network has led to frequent power outages and poor quality of power  Lack of proper metering and theft has led to large scale losses. Only 51% of the power generated is billed and only 41% is realized  Moreover, Government provides power to agricultural sector at subsidized rates and also free of cost in some states. All these factors have resulted in financial disorder of the State Electricity Boards (SEBs).  Restoration of SEBs financial health and improvement in their operating

performance continues to be a critical issue. The Government of India has signed a Memorandum of Understanding (MOU) with various states reflecting the joint commitment of centre and states to undertake reforms in a time bound manner.  Poor return to utilities, which affect their profitability and capacity to make

Further investments  Non-availability of quality coal may hamper thermal plants’ efficiency in

power generation  Inability of SEBs to raise funds, as most of the SEBs is on the verge of

bankruptcy due to poor operational performance. Adding to the problems, 32

SEBs need huge money to measure up competition from efficient private Players Dr.NARLA TATA RAO THERMAL POWER STATION DETAILS OF MAXIMUM CONTINUOUS RUNNING HOURS Table 0-7

UNIT NO

I

II

III

IV

V

VI

FROM

TODATE

No.OF

DATE/TIME(Hrs.Mins)

/TIME(Hrs .Mins)

DAYS(DAYS)

09-12-2005

05-08-2006

14-40hrs

1-24 hrs

18-02-1987

26-07-1987

13-44 hrs

01-52 hrs

14-12-2004

28-02-2006

18-58 hrs

22-24 hrs

23-01-2002

27-07-2002

18-01 hrs

09-54 hrs

20-11-2006

30-06-2007

08-05 hrs

15-00 hrs

24-01-2007

28-08-2007

00-27 hrs

01-09 hrs

*Sources from the company records 33

238

157

441

184

222

216

AWARDS WON BY Dr.NTTPS  Vijayawada Thermal Plant has won the Meritorious Productivity Award for twenty-one consecutive years - In which it has won nine gold medals - and Incentive Award for twelve consecutive years.  Dr.NTTPS BAGS THE INDIA POWER AWARD-2009 FOR OVERALL

UTILITY PERFORMANCE IN THERMAL GENERATION  Dr.NTTPS

bagged an award from Indian Electrical and Electronics

Manufacturers Association (IEEMA) on NDTV Profit for excellence in Thermal Power Generation  Dr.NTTPS bags the INDIA POWER AWARD-2008 for overall utility performance in Generation sector

34

INVENTORY MANAGEMENT Inventory Management is a big part of profit planning for manufacturing and merchandizing companied. Material costs often accounts for more than 40% of total costs of manufacturing companies and more than 70% of total costs in merchandizing companies. Inventory management is the planning and coordinating and controlling activities related to the flow of inventories into through and out of an organization. Inventory constitutes the most significant part of current assets of a large majority of companies in India. On an average inventories are approximately 60% of current assets in public limited companies in India. Because of the large size of inventories are maintained by firms a considerable amount of funds is required be committed to them. It is, therefore absolutely imperative to manage efficiently and effectively in order to avoid unnecessary investment. It also provides a cushion for future price fluctuations. The purpose of inventory management is to ensure availability of materials in sufficient quantity as and when required and also to minimize investment in inventories. Inventory is stock of the product a company is manufacturing for sale and components that make up the product. There are main three type of inventory:  Raw Material  Work-in-process  Finished Goods.

35

 Raw Materials are those basic inputs that are converted into finished products

through the manufacturing process. Raw materials inventories are those units, which have been purchased and stored for future productions. The quantity of raw materials required will be determined by the rate of consumption and the time required for replenishing the supplies. The factors like the availability of raw materials and government regulations, etc. too affect the stock of raw materials.  Work-in-Process inventories are semi-manufactured products. They represent

products that need more work before they become finished products for sale. The work-in-progress is that stage of stocks which are in between raw materials and finished goods. The greater the time taken in manufacturing, the more will be the amount of work in progress. 

Finished Goods inventories are those completely manufactured products, which are ready for sale. These are the goods which are ready for the consumers. The stock of finished goods provides a buffer between production and market. The purpose of maintaining inventory is to ensure proper supply of goods to consumers. In some concerns the production is undertaken on order basis, in these concerns there will not be a need for finished goods. The need for finished goods inventory will be more when production is undertaken in general without waiting for specific orders.

 Spares also form a part of inventory. Some industries like transport will require

more spares than the other concerns. The costly spare parts like engines, maintenance spares etc. are not discarded after use, rather they are kept in ready position for further use. All decision about spares is based on the financial cost of inventory on such spares and the costs that may arise due to their non-availability. Stock of raw materials and work-in-process facilitates production while stock of finished goods is required for smooth marketing operations. Thus inventories serve as a link between the production and sale of a product. Firms also maintain a fourth kind of 36

inventory, supplies or stores and spares. Supplies include office and plant cleaning materials like soap, brooms, oil, fuels, light bulbs etc. These materials do not directly enter production, but are necessary for production process. Usually these supplies are small parts of the total inventories and do not involve significant investment. The levels of three kinds of inventory for a firm depends n the nature of its business. A manufacturing firm will have substantially high levels of all three kinds of inventories, while a retail or wholesale firm will have a very high level of finished goods and no raw materials and work-in-process inventories. Although holding inventories involves blocking of a firm’s funds and the cost of storage and handling, every business enterprise has to maintain a certain level of inventories to facilitate uninterrupted production and smooth running of business.

NEED TO HOLD INVENTORY Maintaining inventories involves tying up of the company’s funds and incurrence of storage and handling costs. There are three general motives for holding inventories. 1. Transactional motive: It emphasizes the need to maintain inventories to facilitate smooth production and sales operations. 2. Precautionary motive: It necessitates holding of inventories to guard against the risk of unpredictable changes in demand and supply forces and other factors. 3. Speculative motive: It influences the decision to increase or decrease inventory levels to take advantage of price fluctuations. It is not possible for the company procure raw materials whenever it is needed.

37

A time lag exists between demands for material and its supply. Also there exists uncertainty in procuring raw materials in time on many occasions. The procurement of materials may be delayed because of such factors as strike, transport disruption or short supply. Therefore, the firm should maintain sufficient stock of raw material at a given time to streamline production. Other factors, which may necessitate purchasing and holding of raw materials are quantity discounts and anticipated price increase. The firm may purchase large quantities of raw materials than14 needed for the desired production and sales levels to obtain quantity discounts of bulk purchasing. At times, the firm would like to accumulate raw materials in anticipation of price rise. Work-in-process inventory builds up because of the production-cycle. Production-cycle is the time span between introduction of raw material in to production and emergence of finished goods at the completion of production-cycle. Till production-cycle completes stock of work-inprocess has to be maintained. Stock of finished goods has to be held because production and sales are not instantaneous. A firm cannot produce immediately when the customer demand goods on a regular basis, their stock has to be maintained. Stock of finished goods has to be maintained for sudden demand from customers. In case the firm’s sales are seasonal in nature, substantial finished goods inventories should be kept to meet the peak demand. The level of finished goods inventories would depend upon the coordination between sales and production as well as on production time. RISK AND COSTS OF HOLDING INVENTORIES Managing inventories to increase net income requires effectively managing costs that fall into the following five categories: 1. Purchasing Costs: The cost of goods acquired from suppliers, including incoming freight or transportation costs. These costs usually make up the largest cost category of inventories

38

2. Ordering Costs: The cost of preparing and issuing purchase orders, receiving and inspecting the items included in the orders and matching invoices received, purchase orders and delivery records to make payments. Ordering costs include the coast of obtaining purchase approvals, as well as other special processing costs. 3. Carrying Costs: These are the costs that arise, while holding inventory. Carrying costs include the opportunity cost of the investment tied up in inventory and the cost associated with storage; such as space rental, insurance, obsolescence and spoilage. 4. Stock out Costs: These are costs that result when a company runs out of a particular item for which there is customer demand. A company may respond to a stock out by expediting an order from a supplier. Expediting costs of a stock out include the additional ordering costs plus any associated transportation costs. Or the company may lose sales due to the stock out. In this case, the opportunity cost of the stock out includes the lost contribution margin on sales not make due to the items not being in the stock, plus any contribution margin lost on future sales due to customer will caused by the stock out. 5. Capital Costs: Maintaining of inventories results in blocking of the firm’s financial resources. The funds may be arranged from own resources or from outsides. In the former case, there is an opportunity cost of investment while in the later case; the firm has to pay interest to the outsides. 6. Storage and Handling costs: The storage costs include the rental of the godown, insurance charges, etc. 7. Risk of Price Decline: This may be due to increased market supplies, competition or general depression in the market. 39

8. Risk of Obsolescence: The inventories may become obsolete due to improved technology, changes in requirements, change in customer’s tastes, etc. 9. Risk Deterioration in Quality: The quality of the materials may also deteriorate while the inventories are kept in store.

OBJECTIVE OF INVENTORY MANAGEMENT: In the context of inventory management the firm is faced with the problem of meeting two conflicting needs.  To maintain a large size of inventories of raw material and work-in-process for

efficient and smooth production and of finished goods for uninterrupted sales operations. 

To maintain a minimum level of investment in inventories to maximize profitability.

The objective of inventory management should be to determine and maintain optimum level of inventory investment. To optimum level of inventory will lie between the two danger points of excessive and inadequate inventories. The firm should always avoid a situation of over investment or under investment in inventories. The major dangers of over investment are: a) Unnecessary tie up of the firm’s funds and loss of profit and opportunity costs. b) Excessive carrying costs c) Risk of liquidity. The consequences of under investment in inventories are: a) Production hold ups, and 40

b) Failure to meet delivery commitments. Thus, efforts should be made to place an order at right time with the right source to acquire the right quantity at the right price and quantity. An effective inventory management should

 Ensure a continuous supply of raw material to facilitate uninterrupted production.  Maintain sufficient stocks of raw materials in periods of short supply and

anticipated price changes. Maintain sufficient finished goods inventory for smooth sales operations and



efficient customer services.  Minimize the carrying costs and time, and Control investment in inventories and

keep it at an optimum level.

TOOLS & TECHNIQUES OF INVENTORY MANAGEMENT AND CONTROL The following are the important tools and technique of inventory management and control. 1. Determination of stock levels. 2. Determination of safety stocks. 3. Selecting a proper system of ordering for inventory. 4. Determination of economic order quantity. 5. A.B.C. Analysis. 6. V.E.D. Analysis. 7. Inventory turnover ratios. 41

8. Aging schedule of inventories 9. Classification and codification of inventories 10. Preparation of inventory reports. Determination of stock levels: Carrying of too much and too little of inventories is detrimental to the firm. If the inventory level is too little, the firm will face frequent stock-outs involving heavy ordering cost and if the inventory level is too high it will be unnecessary tie-up of capital. Therefore, an affective inventory management requires that a firm should maintain an optimum level of inventory where inventory costs are the minimum and at the same time there is no stock-out which may result in lost of sale or stoppage of production. Various stock levels are discussed as such. a. Minimum Level: This represents the quality which must be maintained in hand at

all times. If stocks are less than the minimum level then the work will stop due to shortage of materials. Following factors are taken into account while fixing minimum stock level:  Lead Time: The time taken in processing the order and then executing it is

known as lead time. It is essential to maintain some inventory during the period.  Rate of Consumption: It is the average consumption of material in the

factory.  Nature of Material: If a material is required only against special orders of the

customer than minimum stock will not be required for such materials. Minimum stock level can be calculated with the help of following formula: Minimum stock level = Re-ordering level – (Normal consumption) ´ Normal Re-order period)

42

b. Re-ordering Level: Re-ordering level or ordering level is fixed between

minimum level and maximum level. Re-ordering level is fixed with the following formula: Re-ordering Level = Maximum Consumption ´ Maximum Re-order period. c. Maximum Level: It is the quantity of material beyond which a firm should not

exceed its stocks. If the quantity exceeds maximum level limit then it will be overstocking. A firm should avoid overstocking because it will result in high material costs. Overstocking will mean blocking of more working capital, more space for storing the materials, more wastage of materials and more chances of losses from obsolescence. Maximum Stock Level = Re-ordering Level + Re-ordering Quantity – (Minimum Consumption ´ Minimum Re-ordering period). d. Danger Level: It is the level beyond which materials should not fall in any case. If

danger level arises then immediate steps should be taken to replenish the stocks even if more cost is incurred in arranging the materials. If materials are not arranged immediately there is a possibility of stoppage of work. Danger Level = Average Consumption ´ Maximum re-order period for emergency purchases. e. Average Stocks Level: The average stock level is calculated as such:

Average Stock Level = Minimum Stock Level + ½ of re-order quantity. 3. Determination of Safety Stocks Safety stock is a buffer to meet some unanticipated increase in usage. The usage of inventory cannot be perfectly forecasted. It fluctuates over a period of time. The demand for materials may fluctuate and delivery of inventory may also be delayed and in such a situation the firm can face a problem of stock-out. The stock-out can 43

prove costly by affecting the smooth working of the concern. In order to protect against the stock out arising out of usage fluctuations, firms usually maintain some margin of safety or safety stocks. The basic problem is to determine the level of quantity of safety stocks. Two costs are involved in the determination of this stock i.e. opportunity cost of stock-outs and the carrying costs. The stock outs of raw materials cause production disruption resulting into higher cost of production. Similarly, the stock-out of finished goods result into the failure of the firm in competition as the firm cannot provide customer service. If a firm maintain low level of safety frequent stock-outs will occur resulting into the large opportunity costs. On the other hand, the larger quantity of safety stocks involves higher carrying costs. 4. Ordering systems of Inventory The basic problem of inventory is to decide the re-order point. This point indicates when an order should be placed. The re-order point is determined with the help of these things: (a) average consumption rate, (b) duration of lead time, (c) economic order quantity, when the inventory is depleted to lead time consumption, the order should be placed. There are three prevalent system of ordering and a concern can choose any one of these:  Fixed order quantity system generally known as economic order quantity (EOQ) system;  Fixed period order system or periodic re-ordering system or periodic review system;  Single order and schedule part delivery system. 5. Economic Order Quantity (EOQ) •

Economic order quantity is the size of the lot to be purchased which is economically viable. This is the quantity of materials which can be purchased at 44

minimum costs. Generally, economic order quantity is the point at which inventory carrying costs are equal to order costs. In determining economic order quantity it is assumed that cost of managing inventory is made up solely of two parts i.e., ordering costs and carrying costs. •

Ordering costs: These are the costs which are associated with the purchasing or ordering of materials. These costs include:

 Costs of staff posted for ordering of goods. A purchase order is processed and then placed with suppliers. The labour spent on this process is included in ordering costs.  Expenses incurred on transportation of goods purchased.  Inspection costs of incoming materials.  Cost of stationery, typing, postage, telephone charges, etc.  These costs are also known as buying costs and will arise only when some purchases are made. When materials are manufactured in the concern then these costs will be known as set-up costs. These costs will include costs of setting up machinery for manufacturing materials, time taken up in setting, cost of tools, etc.  The ordering costs are totaled up for the year and then divided by the number of

orders placed each year. B. Carrying Costs: These are the costs of holding the inventories. These costs will

not be incurred if inventories are not carried. These costs include: 1. The cost of capital invested in inventories. An interest will be paid on the amount of capital locked-up in inventories. 2. Cost of storage which could have been used for other purpose.

45

3. The lost of materials due to deterioration and obsolescence. The materials may

deteriorate with passage of time. The loss of obsolescence arises when the materials in stock are not usable because of change in process or product. 4. Insurance cost. 5. Cost of spoilage in handling of materials. 6. The longer the materials kept in stocks, the costlier it becomes by 20 percent every year. The ordering and carrying costs have a reverse relationship. The ordering cost goes up with the increase in number of orders placed. On with the increase in number of units, purchased and stored. 7. The ordering and carrying costs of materials being high, an effort should be made

to minimize these costs. The quantity to be ordered should be large so that economy may be made in transport costs and discounts may also be earned. On the other hand, storing facilities, capital to be locked up, insurance costs should also be taken into account. •

Assumptions of EOQ: While calculating EOQ the following assumptions are made.

1. The supply of goods is satisfactory. The goods can be purchased whenever these are needed. 2. The quantity to be purchased by the concern is certain. 3. The prices of goods are stable. It results in stabilising carrying costs. 4. When above-mentioned conditions are satisfied, economic order quantity can be calculated with the help of the following formula: EOQ =

2AS I

46

Where

A = Annual consumption in rupees. S = Cost of placing an order. I = Inventory carrying costs of one unit.

•

EOQ and Quality Discount: Customer is offered some discount for bulk purchase or if the size of a single order is large. Thus, the price per unit of an item may decrease for buying larger quantities. The quantity discount affect inventory cost in three ways:

 As the price per unit is reduced, the total price for the lot is reduced.  The lot size is increased, the number of offers is reduced and as a result the total ordering cost is reduced.  The average inventory holding increase and as a result the storage cost will increase.  Thus, to decide whether to avail the quantity discount or not, first of all EOQ is

determined and then its total cost without quantity discount and with quantity discount is determined. In case, the total cost is less due to quantity discount the offer is accepted, otherwise it is rejected. The following example illustrates the point. 5. A-B.C Analysis The materials are divided into a number of categories for adopting a selective approach for material control. Under A-B-C analysis, the materials are divided into three categories viz, A, B and C. Past experience has shown that almost 10 percent of the items contribute to 70 percent of value of consumption and this category is called ‘A’ Category. About 20 percent of the items contribute about 20 percent of value of consumption and this is known as category ‘B’ materials. Category ‘C’ covers about 70 percent of items of materials which contribute only 10 percent of value of 47

consumption. There may be some variation in different organizations and an adjustment can be made in these percentages.

The information is shown in the following diagram: Table 0-8

Class

No. of Items %

Value of Items %

A

10

70

B

20

20

C

70

10 *Sources from the literature

•

A-B-C analysis helps to concentrate more efforts on category A since greatest monetary advantage will come by controlling these items. An intention should be paid in estimating requirements, purchasing, maintaining safety stocks and properly storing of ‘A’ category materials. These items are kept under a constant review so that a substantial material cost may be controlled. The control ‘C’ items may be relaxed and these stocks may be purchased for the year. A little more attention should be given towards ‘B’ category items and their purchase should be undertaken at quarterly or half-yearly intervals.

6. VED Analysis The VED analysis is used generally for spare parts. Spare parts are classified as Vital (V), Essential (E) and Desirable (D). The vital spares are a must for running the concern smoothly and these must be stored adequately. The non-availability of vital spare will cause havoc in the concern. The E types of spares are also necessary but 48

their stocks may be kept at low figures. The stocking of D type of spares may be avoided at times. If the lead time of these spares is less, then stocking of these spares can be avoided. The classification of spares under three categories is an important decision. The classification of spares should be left to the technical staff because they know the need urgency and use of these spares. 7. Inventory Turnover Ratios Inventory turnover ratios are calculated to indicate whether inventories have been used efficiently or not. The purpose is to ensure the blocking of only required minimum funds in inventory. The inventory turnover ratio also known as stock velocity is normally calculated as sales/average inventory or cost of goods sold/average inventory cost. Inventory conversion period may also be calculated to find the average time taken for clearing the stocks.

Symbolically, Inventory

Turnover

Ratio =

Cost of Good Sold Average Inventory at Cost

=

Net Sales (Average ) Inventory

8. Aging Schedule of Inventories Classification of inventories according to the period (age) of their holdings also helps in identifying show moving inventories thereby helping in effective control and management of inventories. 9. Classification and Codification of Inventories The inventories of a manufacturing concern may consist of raw materials, work in process, finished goods, spares, consumable stocks, etc. All these categories may have 49

their sub-divisions. The raw materials used may be of 3-4 types, finished goods may also be of more than one type, spares may be of a number of types and so on. For a proper recording and control of inventory, a proper classification of various types of items is essential. The inventories should first be classified and then code numbers should be assigned for their identification. The identification of short names are useful for inventory management not only for large concerns but also for small concerns. Lack of proper classification may also lead to reduction in production. Generally, materials are classified according to their nature such as construction materials, consumable stocks, spares, lubricants, etc. The coding class of materials is assigned two digits and then two or three digits are assigned to the category of materials in that class. The third distinction is needed for the quality of goods and decimals are used to note this factor.

JUST IN TIME (JIT) INVENTORY CONTROL SYSTEM •

The term JIT refers to a management tool that helps to produce only the needed quantities at the needed time. According to the official terminology of C.I.M.A., JIT is “a technique for the organization of workflows, to allow rapid, high quality, flexible production whilst minimizing manufacturing work and stock level.” There are broadly two aspects of JIT (i) just in time production, and (ii) just in time purchasing.

•

Just in time inventory control system involves the purchase of materials in such a way that delivery of purchased material is assured just before their use or demand. The philosophy of JIT control system implies that the firm should maintain a minimum (zero level) of inventory and rely on suppliers to provide materials just in time to meet the requirements. The traditional inventory control system, on the other hand, requires maintaining a healthy level of safety stock to provide protection against uncertainties of production and supplies.

Objective of JIT 50

•

The ultimate goal of JIT is to reduce wastage and enhance productivity. The important objectives of JIT include:

1. Minimum / zero inventory and its associated costs. 2. Elimination of non-value added activities and all wastes. 3. Minimum batch / lot size. 4. Zero breakdowns and continuous flow of production. 5. Ensure timely delivery schedules both inside and outside the firm. 6. Manufacturing the right product at right time. Features of JIT a. It

emphasizes that firms following traditions inventory control system

overestimate ordering cost and underestimate carrying costs associated with holding of inventories. b. It advocates maintaining good relations with suppliers so as to enable purchase of right quantity of material at right time. c. It involves frequent production / order runs because of smaller batch/lot sizes. d. It requires reduction in set up time as well as processing time. e. Purchase of produce in response to need rather than as per the plans and forecasts. Advantages of JIT Inventory Control System i.

The right quantities of materials are purchased or produced at the right time.

ii.

Investment in inventory is reduces.

iii.

Wastes are eliminated.

51

iv.

Carrying or holding cost of inventory is also reduced because of reduced inventory.

v.

Reduction in costs of quality such as inspection, costs of delayed delivery, early delivery, processing documents etc. resulting into overall reduction in cost.

INVENTORY RATIO The impact of various inventory management techniques such as ABC analysis, perpetual inventory, etc adopted in most of the industrial undertakings is not very clear. An analysis of inventory ratio will clarify this point. These ratios provide guidelines for planning and controlling of inventories of industrial units. They also provide relative or comparative information about the performance of the inventory function. The manufacturing firms generally have four kinds of inventories. i. Stores and spars ii. Raw materials iii. Work-in-progress iv. Finished goods 1 INVENTORY TURNOVER RATIO (ITR) It is an important parameter used to evaluate the performance of the inventory function, and ratios useful to inventory management are:  Inventory turnover ratio  Store and spares inventory holding period  Conversion period of work in progress  Inventory as per percentage of current asset  Inventory as percentage of total asset 52

 Inventory in term of months of production  Number in days stock in hand ratio  Return per rupee invested ratio

4.11.1 INVENTORY TURNOVER RATIO (ITR) It is an important parameter used to evaluate the performance of the inventory function, and expressed as: Cost of sales during the period ITR=______________________________________ Average stock held during the period Here the average stock indicates the yearly average (average of opening and closing inventory), where the numerator of the ratio, i.e. the cost of sales means sale minus gross profit. Since inventories are valued in term of their cost, the cost of sales rather than sales has been used in computing the turnover ratio. The inventory turnover shows how quickly the inventory is turning into receivable/cash through sale. This ratio indicates the number of times the stock is turned over on the average and must inventories is reflected in the number of time the firm’s average inventory is turned over during the year. Inventory turnover has a direct relationship with the profit-earning capacity of the firm. Generally, the higher the rate of inventory turnover, the larger the amount of profit, the smaller the amount of work-in-capital tied up with inventory, and the more current the stock of merchandise. Each turn over adds to the volume of profit. A low inventory turnover implies excessive inventory levels compared to those warranted by production and sales activities, or a slow moving, or obsolete inventory. A high level of sluggish inventory amount to unnecessary tie-up of funds is impairment of profits and increased cost. If the obsolete inventories have to be written off, this will adversely affect the

53

working capital. And liquidity position of the firm. Thus a higher turnover is better than a lower turnover. Ideally, the inventory should be 12 and 20 percent of the sales value. As such, inventory turnover ratio should be within the range of 5.0-8.3, while it is also opined that the same could be 9 as well. It is, therefore, recommended that the inventory turnover ratio should be between 5 and 9.

2. STORES AND SPARES INVENTORY HOLDING PERIOD Stores and spares is a term which commonly covers all kinds of supplies necessary to keep the production equipments operating in order to turn out production to the desired quantity and quality at the desire time. The lack of spares is often the one of the most serious bottlenecks in on interrupted production.Stores and spares inventory constitute a large number of items, some of them are most important and require longer period of time to procure while most of them are not that important and require shorter periods of time to procure. In discriminate stocking of each and every item of stores and spares is not wise because a huge amount of funds may unnecessarily get locked up in the component of stores and spares. Thus the stock of components of stores and spares should be kept to a reasonable level. Stores and spares inventory is the slowest moving among the four components of inventory. A close watch on the movement of this component of inventory and its affective control can pay rich dividends to a firm. In most of the firms, the stores and spares inventory occupies, on an average, about two-third of the total inventory. Such huge amount of investment in the stores and spares .inventory affects both liquidity and profitability of firms. Annual consumption of stores and spares 54

Stores and spares inventory turnover=______________________________________ Stores and spares inventory

The suggested norm for the stores and spares inventory holding period should be between three and six months. But in most of the firms, the stores and spares holding period is above the suggested norms. Thus the inference that can be drawn is that there is an over investment in stores and spares on account of poor inventory management. Long lead time’s procedural delays in procurement and uncertainty about availability, particularly of imported items are the main reasons which compel the firm to have more stocks of stores and spares. Moreover, heavy initial purchases at the time of procurement of new machineries and subsequent purchases without proper assignment of the requirement are also responsible for such huge investment in stores and spares. 3 . CONVERSION PERIOD OF WORK-IN-PROGRESS (WIP) Work-in-progress inventories represent product that need more work before they become finished product for sale. They are semi manufactured products. The longer the production cycles, the grater the volume of work-in-progress and vice-versa. It is calculated by dividing the WPI inventory by the cost of production and then multiplying the result by 365.The suggested norm is that the work-in-progress conversion period should be less then 15 days. But this period is abnormally high in most of the firms. This situation is the result of week inventory management and hence is liable to affect the profitability of the firms. 4 . INVENTORY AS A PERCENTAGE OF CURRENT ASSET The share of inventory in the current assets indicates how much liability of a firm is locked up in inventory. Inventory is generally ness liquid then other current asset. As such the inventory is the most non-liquid current asset.

55

Total inventory * 100 Inventory as a percentage of current=_________________________ asset Total current cost The quality and liquidity of current asset are largely dependent on the composition of current asset. The lower the percentage of inventory to the current assets is the greater the liquidity of current assets and vice-versa. Thus a low ratio is greater than high ratio asset.

5 . INVENTORY AS A PERCENTAGE OF TOTAL ASSETS Inventory is an important element in the asset structure of an industrial under taking. As such, its share in the asset structure and the proportion if the funds invested in inventory for operational activities of the undertaking should be examined.

Total inventory * 100 Inventory to total asset =

_________________________ Total asset

6 . INVENTORY IN TERM OF MONTHS’ COST OF PRODUCTION The main yardstick used to measure the accuracy of the inventory is the month’s value of the usage. For the purpose, the aggregate inventory is converted in to month’s value of production, the stores and spares inventory to their month’s consumption and the workedin-progress is assessed in term month’s cost of production. Investment in inventory in term of months’ value of production is ascertain as follows

56

value of inventory __________________________________

*12

Cost of production excluding depreciation Depreciation is excluded from the cost of production as depreciation does not involve case outflows.

NUMBER OF DAYS STOCK-IN-HAND RATIO Number of days in stock-in-hand ratio =stock * 365 _________ Cost of sales The ratio measures the efficiency in selling the goods. The smaller the number of day’s stock-in-hand, the higher the efficiency in inventory management. 7 . RETURN PER RUPEE INVESTED RATIO Return per rupee invested ratio is

Annual gross margin _________________________ Inventory

The ratio shows efficiency in management of inventory in term of profitability. The higher this ratio is the better the management.

57

APGENCO CORPORATION LIMITED Dr.NARLA TATA RAO THERMAL POWER STATION STORE ANALYSIS. Year wise Inventory levels from 2003 to 2004(in Crs) & graphical representation Table 0-9

S.No 1 2 3 4 5 6 7 8

Description

Opening

Receipts

Issues

Balance Coal 22.21 890.98 884.62 Furnace oil 3.45 3.44 4.15 HSD oil 0.90 1.00 1.15 Lubricants 0.44 1.63 1.62 Spares 98.25 33.65 40.98 Consumables 5.80 18.15 16.32 Chemicals 0.01 1.25 1.25 Others 0.56 3.26 3.42 TOTAL 131.62 953.36 953.51 *Sources from the company records

58

Closing Balance 28.57 2.74 0.75 0.45 90.92 7.63 0.01 0.40 131.47

Figure 0-7

Year wise Inventory levels from 2004 to 2005(in Crs) Table 0-10

S.No 1 2 3 4 5 6 7 8

Description

Opening

Receipts

Issues

Balance Coal 28.57 926.79 921.48 Furnace oil 2.74 5.90 4.01 HSD oil 0.75 1.57 1.16 Lubricants 0.45 1.55 1.63 Spares 90.92 59.31 58.16 Consumables 7.63 12.95 11.91 Chemicals 0.01 1.38 1.38 Others 0.40 0.95 1.00 TOTAL 131.47 1010.40 1001.23 *Sources from the company records

59

Closing Balance 33.38 4.63 1.16 0.37 92.07 8.67 0.01 0.35 140.64

Figure 0-2

Year wise Inventory levels from 2005 to 2006(in Crs) Table 0-11

S.No 1 2 3 4 5 6 7 8

Description

Opening

Receipts

Issues

Balance Coal 33.38 961.62 951.67 Furnace oil 4.63 2.90 4.61 HSD oil 1.16 0.80 1.29 Lubricants 0.37 1.85 1.82 Spares 92.07 29.42 22.36 Consumables 8.67 9.30 8.04 Chemicals 0.01 1.91 1.91 Others 0.35 0.43 0.46 TOTAL 140.64 1008.23 992.16 *Sources from the company records

60

Closing Balance 43.333 2.92 0.67 0.40 99.13 9.93 0.01 0.32 156.71

Figure 0-3

Year wise Inventory levels from 2006 to 2007(in Crs) Table 0-12

S.No 1 2 3 4 5 6 7 8

Description

Opening

Receipts

Issues

Balance Coal 43.333 968.11 967.98 Furnace oil 2.92 5.37 4.95 HSD oil 0.67 1.49 1.28 Lubricants 0.40 2.36 1.89 Spares 99.13 35.15 22.59 Consumables 9.93 2.93 9.37 Chemicals 0.01 1.36 1.37 Others 0.32 7.46 4.13 TOTAL 156.71 1024.23 1013.56 *Sources from the company records

61

Closing Balance 43.46 3.34 0.88 0.87 48.55 3.49 0.00 3.65 167.38

Figure 0-4

Year wise Inventory levels from 2007to 2008(in Crs) Table 0-13

S.No 1 2 3 4 5 6 7 8

Description

Opening

Receipts

Issues

Balance Coal 43.46 1016.85 1024.69 Furnace oil 3.34 6.01 5.06 HSD oil 0.88 0.99 1.35 Lubricants 0.87 2.27 2.31 Spares 48.55 40.94 49.84 Consumables 3.49 8.49 7.2 Chemicals 0.00 1.86 1.11 Others 3.65 5.15 5.79 TOTAL 167.38 1082.56 1097.35 *Sources from the company records

62

Closing Balance 35.62 4.29 0.52 0.83 102.79 4.78 0.75 3.01 152.59

Figure 0-5

CALCULATIONS OF INVENTORY TURNOVER RATIOS IN YEAR WISE. Cost of goods sold Inventory turnover ratio=------------------------------Average inventory

Cost of goods sold(COGS)=opening stock+ purchases-closing stock

Opening stock + closing stock Average inventory=---------------------------------------------------2

Ratios of 2003-04 63

Coal inventory turnover ratio=884.62/25.39 = 34.84 times Furnace oil inventory turnover ratio= 4.15/3.095= 1.34 times High speed oil inventory turnover ratio= 1.15/0.825=1.39 times Lubricants inventory turnover ratio=1.62/0.995=1.628 times Spares inventory turnover ratio=40.98/94.585=0.43 times Consumables inventory turnover ratio=16.32/6.715=2.43 times Chemicals inventory turnover ratio=1.25/0.01=125 times Other material inventory ratio=3.24/0.48=7.125 times Ratios of 2004-05 Coal inventory turnover ratio=921.98/30.975 = 29.76times Furnace oil inventory turnover ratio= 4.01/3.685= 1.088 times High speed oil inventory turnover ratio= 1.16/0.955=1.215 times Lubricants inventory turnover ratio=1.63/0.441=3.98 times Spares inventory turnover ratio=58.16/91.495=0.643 times Consumables inventory turnover ratio=11.91/8.15=1.46 times Chemicals inventory turnover ratio=1.38/0.01=138 times Other material inventory ratio=1.00/0.375=2.67 times

Ratios of 2005-06 Coal inventory turnover ratio=951.67/38.39 = 24.84 times 64

Furnace oil inventory turnover ratio= 4.61/3.775= 1.221 times High speed oil inventory turnover ratio= 1.29/0.915=1.41 times Lubricants inventory turnover ratio=1.82/0.385=4.73 times Spares inventory turnover ratio=22.36/95.85=0.23 times Consumables inventory turnover ratio=8.04/9.3=0.86 times Chemicals inventory turnover ratio=1.91/0.01=191 times Other material inventory ratio=0.46/0.335=1.37 times

Ratios of 2006-07 Coal inventory turnover ratio=967.98/43.395= 22.306times Furnace oil inventory turnover ratio= 4.95/3.13= 1.58 times High speed oil inventory turnover ratio= 1.28/0.775=1.65 times Lubricants inventory turnover ratio=1.89/0.635=2.98 times Spares inventory turnover ratio=22.59/105.41=0.214 times Consumables inventory turnover ratio=9.37/6.715=1.40 times Chemicals inventory turnover ratio=1.37/0.005=274 times Other material inventory ratio=4.13/1.985=2.080 times

Ratios of 2007-08 Coal inventory turnover ratio=1024.69/39.54=22.306 times 65

Furnace oil inventory turnover ratio= 5.06/3.185= 1.326 times High speed oil inventory turnover ratio= 1.35/0.7=1.98 times Lubricants inventory turnover ratio=2.31/0.85=2.72 times Spares inventory turnover ratio=49.84/107.24=0.46 times Consumables inventory turnover ratio=7.2/4.135=1.74 times Chemicals inventory turnover ratio=1.11/0.375=2.96 times Other material inventory ratio=5.79/3.33=1.74 times

CONCLUSION Power is one of the prime movers of economic development. The basic responsibility of power supply industry is to provide adequate electricity at economic cost, while ensuring reliability and quality of supply. Significant impetus by successive Governments has resulted in increase in capacity from 1,300 MW during independence to more than 100,000 MW today. Along with the growth in installed generation capacity, there has also been a phenomenal increase in the transmission and distribution capacity. However, despite the significant progress in capacity addition, the demand for electricity continues

to outstrip supply with the result that energy and peaking

shortages continue to plaque the economy. The India possesses a vast opportunity to grow in the field of power generation, transmission, and distribution. The target of over 150,000 MW of Hydel power generation is yet to be achieved. By the year 2012, India requires an additional 100,000 MW of generation capacity.A huge capital investment is required to meet this target. This has welcomed numerous power generation, transmission, and distribution companies across the globe to establish theiroperations in the country under the famous PPP (public-private partnership) programmes. The power sector is still experiencing a large demand-supply gap. This has called for aneffective 66

consideration of some of strategic initiatives. There are strong opportunities intransmission network ventures -additional 60,000 circuit kilometres of transmission networkis expected by 2012 with a total investment opportunity of about US$ 200 billion.

FINDINGS  Most of the SEBs though are supported by state government, are running under loss. This is because of power theft, transmission losses, use of conventional methods for power generation and transmission and out dated management policies.  Indian power

sector has been witnessing a wide demand – supply gap.

Although electricity generation has increased substantially, it has not been able to meet the demand.  As per the information and explanation given to us the physical verification of

inventory has been conducted by the management at reasonable intervals.  The producers of physical verification of inventories followed by the management are reasonable and adequate in relation to the size of the company and nature of the business.

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 The company is maintaining proper records of inventory. As per the information

and explanations given to us, no material discrepancies were noticed on physical verification.  Presently company maintains adequate inventory turnover ratio as a company exhibits good signs.  In the year 2008-09 the company coal usage rate is higher than the other years.Management of coal in Dr.NTTPS maintaining a 30 days of stock at minimum level because it is a non pit station.  There is no proper control over shrinkage, transit, and windage of coal. Comparitively,the transit,shrinkage and windage is more in 2005-06 is Rs2917.50 lakhs which amounts to gradually it has been decreasing in the subsequent years.The loss incurred in 2008-09 is Rs.2447.60 lakhs.  In Dr.NTTPS, the inventory issues are being done on first in first out (FIFO) but the pricing is done on the weighted average method.

SUGGESTIONS  There is a higher loss in the shrinkage and wind age .Dr.NTTPS authorities may

try to control these losses.  It is evident that transit loss can be reduced and reduction of transit loss will save

Dr.NTTPS funds to be extent.  Dr.NTTPS is not maintaining stock levels so authorities may look into this fact and try to adopt stock levels i.e., maximum level and minimum level and EOQ etc.  In a bid to bring structural transformations, necessary reform programs should be carried out in distribution and transmission process. 68

 Restoration of the financial health of the State Electricity Boards / State Utilities was recognized as the most critical challenge facing the sector. In this context it becomes clear

that

the distribution sector needed urgent attention if

the

trend of deteriorating financial health had to be reversed. The reversal would need a combination of the following key measures:• Control of theft of electricity • Reduction in the cost of supply through reduction in technical losses. • Better management and lowering the cost of generation • Payment of user charge and Tariff rationalization

BIBLIOGRAPHY  Financial management by IM Pandey  Management accounting by Shasi k.gupta.

Web sites 69

www.apgenco.gov.in www.ebschohost.com http://www.indexmundi.com/India/electricity_consumption.html http://www.indexmundi.com/India/electricity_production.html

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