Inventary Mgnt

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A STUDY ON

INVENTORY MANAGEMENT

WITH REFERENCE TO

NAGARJUNA FERTILIZERS AND CHEMICALS LTD

KAKINADA

A project report submitted to the Department of Management Studies, jntuk,

Kakinada, in partial Fulfillment for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

Submitted by

G PRABHAKAR REDDY

NALANDA INSTITUTE OF TECHNOLOGY

SATTENAPALLI(KANTEPUDI)

2009 - 2011



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ACKNOWLEDGMENT

I take this opportunity to express my gratitude to

SRI.S.KRISHNA MURTHY,DGM(PLANT HPD),

Mr. P.S.N. MURTHY, D.G.M (FINANCE),

for giving me the privilege to undergo project work on

³A STUDY on Inventory management in NFCL.´

I would like to express my sincere thanks to

Smt Y.RAMADEVI ,HEAD TRAINING &DEVELOPMENT,

of NFCL, who guided me throughout tenure of this project, work

in innumerable ways.

In the presentation of this report I recall with a sincere

gratitude to each of those who have been a source of immense help

and inspiration during the process of my project work. I feel grateful

to my family members and friends for their kind co-operation.



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DECLARATION

I hereby declare that this project entitled

³INVENTORY MANAGEMENT´ with reference to

³NAGARJUNA FERTILIZERS AND CHEMICALS LTD,

KAKINADA´ is the original work done by me and submitted

to JNTUK, KAKINADA in partial fulfillment of the

requirement for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION and this

has not been submitted to any other university or publication

any time.



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CONTENTS

CHAPTER-I

INTRODUCTION

SCOPE OF THE STUDY

SIGNIFICANCE OF THE STUDY

OBJECTIVES

METHODOLOGY

LIMITATIONS

CHAPTER-II

INDUSTRY PROFILE

CHAPTER-III

COMPANY PROFILE

CHAPTER-IV

THEORETICAL FRAMEWORK

CHAPTER-V

ANALSIS &INTERPRETATIONS

CHAPTER-VI

FINDINGS

SUGGESTIONS

CONCLUSION

BIBLOGRAPHY



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INTRODUCTION

Finance is regarded as ́ THE LIFE BLOOD OF BUSINESS

ENTERPRISEµ. Finance function has become so important that it has given

birth to financial management as a separate subject. So, this subject is

acquiring universal applicability. Financial Management is that managerial

activity which is concerned with the planning and controlling of the firm·s

financial resources. As a separate activity or discipline is of recent origin it

was a branch of economics till 1890. Still today it has no unique knowledge

of its own, and it draws heavily on economy for its theoretical co ncepts.

The subject of financial management is of immense interest to both

academicians and practicing managers. It is of great interest to

academicians because the subject is still developing, and there are still

certain areas where controversies exist for which no unanimous solutions

have been reached as yet. Practicing Managers are interested in this subject

because among the most crucial decisions of the firm are those which relate

to finance and an understanding of the theory of financial managemen t

provides them with conceptual and analytical insights .



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Scope of Finance Management:

Firms create manufacturing capacities for production for goods; some

provide services to customers. They sell their goods or services to earn

profits. They raise funds to acquire manufacturing and other facilities.

Thus, the three most important activities of a business firm are:

Production

Marketing

Finance

A firm secures whatever capital it needs and employees it (finance

activity) in activities that generate returns on invested capital (production

and marketing activities). A business firm thus is an entity that engages in

activities to perform the functions of finance, production and marketing.

The raising of capital funds and using them for generating returns to the

supplies of funds is called the finance function of the firm.



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FUNCTIONS OF FINANCIAL MANAGEMENT

Two significant contribution to the development of

modern theory of financial management are:

Theory of Portfolio Management developed by Harry Markowitz in

1950, which deals with portfolio selection with risky investment. This

theory uses statistical concepts to quantify the risk -return

characteristics of holding a group/portfolio of securities, investment

or assets.

The theory of Leverage and Valuation of Fire developed by Modigliani

and Miller in 1958. They have shown by introducing analytical

approach as to how the financial decision making in any firm be

oriented towards maximization of the value of the firm and the

maximization of the shareholders wealth.

Type of Financial Actions:

1. The Financial Management of trading or manufacturing firms

2. Financial Management of Financial Institutions.

3. Financial activities relating to investment activities.



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International Finance:

Public Finance:

Functions are broadly classified into three groups. Those relating to

resource allocation, those covering the financing of these investments and

theses determining how much cash are taken out and how much reinvested.

y Investment decision

y Financing decision

y Dividend decision

y

Liquidity decision

I) Investment Decision:

Firms have scarce resources that must be allocated among

competitive uses. The financial management provides a frame work for

firms to take these decisions wisely. The investment decisions include not

only those that create revenues and profits (e.g. introducing a new product

line) but also those that save money.So, the investment decisions are the decisions relating to assets

composition of the firm. Assets can be classified into fixed assets and

current assets, and therefore the investment decisions can also be

bifurcated into Capital Budgeting decisions and the Working Capital

Management.



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The Capital Budgeting decisions are more crucial for any firm. A

finance manager may be asked to decide about.

1. Which asset should be purchased out of different alternative options;

2. To buy an asset or to get it on lease;

3. To produce a part of the final product or to procure it from some other

supplier;

4. To by or not an other firm as a running concern;

5. Proposal of merger of other group firms to avail the synergies o f

consolidation.

Working Capital Management, on the other hand, deals with the

Management of current assets of the firm. Though the current assets do not

contribute directly to the earnings, yet their existence is necessitated for the

proper, efficient and optimum utilization of fixed assets. There are dangers

of both the excessive working capital as well as the shortage of working

capital. A finance manager has to ensure sufficient and adequate working

capital to the firm.

II) Financing Decisions:

As firms make decisions concerning where to invest these resources,

they have also to decide two they should raise resources. There are two

main sources of finance for nay firm, the shareholders funds and the

borrowed funds. The borrowed funds are always repayable and require

payment of a committed cost in the form of interest on a periodic basis. The

borrowed funds are relatively cheaper but always entail risk.



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The risk is known as the financial risk i.e., the risk of insolvency due to non -

payment of interest or non-repayment of capital amount. The shareholders

fund is the main source of funds to any firm.

This may comprise of the equity share capital, preference share capital and

the accumulated profits. Firms usually adopt a policy of employing both the

borrowed funds as well as the shareholders funds to finance their activities.

The employment of these sources in combination is also known as financial

management.

III) Dividend Decisions:

Another major area of the decision marking by a finance manager is

known as the Dividend decisions which deal with the appropriation of after

tax profits. These profits are available to be distributed among the

shareholders or can be retained by the firm for reinvestment with in the

firm. The profits which are not distributed are impliedly retained in the

firm. Al firms whether small or big, have to decide how much of the profits

should be reinvested back in the business and how much should be taken

out in form of dividends i.e., return on capital. On one hand, paying out

more to the owners may help satisfying their expectations; on the other

hand, doing so has other implications as a business that reinvests less will

tend to grow slower.

Reinvestment opportunities available to the firm,

The opportunity rate of the shareholders .



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IV) Liquidity Decisions:

Current assets management that affects a firm·s

liquidity is yet another important finance function, in addition to the

management of long-term assets. Current assets should be managed

efficiently for safeguarding the firm against the dangers of illiquidity

and insolvency. Investment in current assets a ffects the firm·s

profitability, liquidity and risk.

The Identification of the relevant groups:

The various groups which may have stakes in the financial decisions

making of a firm and therefore required to be3 considered while taking

financial decisions are:

The shareholders

The debt investors,

The employees,

The customer and the suppliers,

The public,

The Government, and

The Management

Objective of the Financial Decision Making

The following two are often considered as the objectives of the

financial management.

The maximization of the profits of the firm, and

The maximization of the shareholders wealth



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Maximization of the Profits of the firm:

For any business firm, the maximization of the profits is often

considered as the implied objective and therefore it is natural to retain the

maximization of profit as the goal of the financial also.

The profit maximization as the objective of financial management has

a built in favour for its choice. The profit is regarded as yard stick for the

economic efficiency of any form. If all business firm of the society are

working towards profit maximization then the economic resources of the

society as a whole would have been most efficiently, economically and

profitably used. The profit maximization by one firm and if targeted by all,

will ensure the maximization of the welfare of the society. So, the profit

maximization as objective of financial management will result inefficient

allocation of resources not only from the point of view of the firm but also for

the society as such.

It ignores the risk.

The profit maximization concentrates on the profitability only and

ignores the financing aspect of that decision and the risk associated

with that financing.

It ignores the timings of costs and returns and thereby ignores the

time value of money

The profit maximization as an objective is ague and ambiguous.

The profit maximization may widen the gap between the perception of

the management and that of the shareholders.



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The profit maximization borrows the concept of profit from the field of

accounting and thus tends to concentrate on the immediate effect of a

financial decisions as reflected in the increase in the profit of that year

or in near future.

Maximization of Shareholder Wealth:

This objective is generally expressed in term of maximization of the

value of a share of a firm. It is necessary to know and determine as to how

the maximization of shareholders wealth is to be measured.

The measure of wealth which is used in financial management is the

concept of economic value. The economic value is defined as the present

value of the future cash flows generated by a decision, discounted as

appropriate rate of discount which reflects the degree of associated risk.

This measure of economic value is based on cash flows rather than profit.

The economic value concept is objective in its approach and also takes into

account the timing of cash flows and the level of risk through the

discounting process .

Profit Maximization Versus Wealth Maximization:

The objective of profit maximization measures the performance of a

firm by a looking at its total profit. The objective of maximization of the

shareholders wealth is operational and objective in its approa ch. A firm that

wishes to maximize the profits may opt to pay no dividend and to reinvest

the retained earnings, whereas a firm that wishes to maximize the



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shareholders wealth may pay regular dividends .



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THE CHANGING ROLE OF FINANCIAL MANAGEMENT:

Many changes in the contemporary world, financial management has

undergone significant changes over the years. The financial management

has a very limited role in business enterprise. Finance Manger is responsible

only for maintaining financial records, preparing reports of the company·s

status, performance and arranging funds recorded by company so that it

would meet its obligations in time.

Financial Manager as a matter of act was regarded as specializes

officers in the company concerned only with administer ing sources of funds,

he has called upon only when the company experimental the problem

relates the financial managers to locate the suitable sources for funds and

additional funds. The emphasis on decision making has continued in recent

years.

First there was been increased belief the cost of capital producer the

required accurate measurement of the cost of capital.

Secondly, capital has been in short supplies the old interest in the

ways of raising funds.

Thirdly, there was has been a continued managerial activity that has

led to revealed interests in takeovers.

Fourthly, accelerated progress in transportation and communication

has brought the countries of the world close together.

They in turn have stimulated interest in the international finance.



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IMPORTANCE OF FINANCIAL MANGEMENT:

Finance Management is of greater importance on the present

corporate world. It is a science of money, which permits the authorizes to go

further.

SIGNIFICANCE OF FINANCIAL MANAGEMENT CAN BESUMMARISED AS:

It assists in the assessment of financial needs of industry large or

small and indicates the internal and external resources for meeting them. It

assesses the efficiency and effectiveness of the financial institution in

mobilizing individual or corporate science. It also prescribes various means

for such mobilization of savings into desirable investment channels.

It assists the management while investing the funds in profitable

projects by analyzing the viability of that project through capital budgeting

techniques. It permits the management to safeguard against the interest of

shareholders by properly utilizing the funds procured from different sources

and it also regulates and controls the funds to get maximize use.



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SCOPE OF THE STUDY:-

The scope of my study is confined to one of the key areas of finance i.e.

inventory management. The study concentrates on the methods and techniques

followed by NAGARJUNA FERTILIZERS AND CHEMICALS LTD for its

inventory management and its relative merits and demerits.

The study appraises the company¶s success in meeting the requirements of the

company and the country by helping the farmers to raise agriculture output to

meet the requirement of the country¶s growing population for food grains.

PURPOSE OF THE STUDY:-

To study about the inventory management at NAGARJUNA

FERTILIZERS AND CHEMICALS LTD and to have an idea about the

utilization of the inventory and little more about the storage procedure that are

practically implemented in organization. Inventory plays a vital role in every

manufacturing organization to have an uninterrupted production process by

maintaining an optimum level of raw materials available at all time.



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OBJECTIVES OF THE STUDY:-

The study titled ³INVENTORY MANAGEMENT´- A case study of

Nagarjuna fertilizers and chemicals ltd., has been carried out with the following

objectives.

To find whether the NFCL ensures a continuous supply of materials to

facilitate uninterrupted production.

To study the inventory management policies, techniques and their

effectiveness.

To give suggestions to increase inventory turnover.

To make an appropriate investment in inventories and keep it at an optimum

level.

To study the efficiency with which the firm is utilizing its inventory management

skills in generating more sales

To study the extent to which the firm has used its inventory management skills and

maximize the wealth of the organization.

This study is made to know whether the inventory is properly managed or not.

To review the structure, original growth and performance of NFCL during the study

period.



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METHODOLOGY OF THE STUDY

The required for this study would be collected through two sources i.e.,

1. Primary Data:

The primary data comprises information obtained by the candidate during

discussions with Heads of Departments and from the meeting with officials and staff.

2. Secondary Data:

The secondary data has been collected from information through Annual

Reports, Public Report, journals relating to fertilizers industry , Bulleting and other

Printed Materials supplied by the Company.

In the present study 1/4

th

of the total information of time is from primary data

and the rest is from the secondary data.

Both primary and secondary data were used in conducting this project

which is as follows:

METHODS

PRIMARY DATA SECONDARY DATA



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LIMITATIONS:-

The below mentioned are the constraints under which my study has been

carried out

The study is limited to NFCL, Kakinada; it does not relate to any other

company of Nagarjuna Group or other firm¶s of Fertilizer Industry.

The smaller time frame for understanding this study is also a significant

limitation.

The ratios are calculated on the basis of past data; these are not future

indicators.

The scope of study is limited to the last five years balance sheets.

The analysis is made basing only on the Annual Reports of NFCL.

Most of the information has been kept confidential and as such is not passed on

as a part of the policy of the company.

Since the number and size of inventory is very large, all the raw materials

could not be included in the analysis.



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INDUSTRY PROFILE

India has been predominantly considered as an agricultural dependent

economy. Agriculture plays a very dominant role as more than one-fourth of our GDP

come from this sector. Nearly 70% of population depends on the agriculture for their

lively-hood. The basic need for an agricultural dependant economy is fertilizers and

urea is one of the main fertilizers. India is the second largest manufacturing country

in the world.

All fertilizers consist if three main ingredients.

Nitrogen²(N) -- which promotes general plant growth

Phosphorous²(P) -- which promotes flowering

Potassium ± (K) ± which promotes strong roots.

The ingredients are mixed in various combinations because plants have different

needs.

The combinations are indicated by a three number code:

The first number is the percent of nitrogen (N)

The second number is the percent of phosphorus (P)

The third number is the percent of potassium (K)

About Fertilizer:

Fertilizer is simply, plant food. Just like the human body needs vitamins and

minerals, plants need nutrients in order to grow. Plants need large amounts of three

nutrients ± nitrogen, phosphorus, and potassium. These are commonly referred to as

macronutrients. Fertilizer makers take those three nutrients from nature and put them

into soluble forms that plants can easily use.

There are a number of other nutrients plants need in small amounts. These are

referred to as the minor nutrients, or micronutrients. These many nutrients are

typically produced separately, but end up being mixed together in varying amou nts to

match the needs of a particular crop. The analysis found on each bag or bulk

shipment of fertilizer tells the farmer or consumer the amount of nutrients being



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supplied. States have a system of laws and regulations that ensure the fertilizer is

properly labeled and delivers the amount for nutrients stated on the bag.

Our world would be vastly different without commercial fertilizers. Following

the World War II, new technologies allowed for the rapid expansion of fertilizer

production. Coupled with growing food demand and the development of higher -

yielding crop varieties, fertilizer helped fuel the Green Revolution. Today, the

abundance of food we enjoy is just one way fertilizers help enrich the world around

us.

While fertilizers provide many important benefits that are necessary for our

way of life, the improper use of fertilizers can harm our environment. We¶ve used the

most recent developments in science to study our products and make sure safety

comes first.

FERTILIZER:

Fuel for growing plants just like humans and animals, plants need adequate

water, sufficient food, and protection from diseases and pests to be healthy.

Commercially produced fertilizers give growing plants the nutrients they crave in the

form they can most readily absorb and use: nitrogen (N), available phosphate (P) and

soluble potash (K), Elements needed in smaller amounts, or micronutrients, include

iron (Fe); zinc (Zn), copper (Cu) and boron (B).

Each crop year, certain amounts of these nutrients are depleted and must be

returned to the soil to maintain fertility and ensure continued, healthy future crops.

Scientists project that the earth¶s soil contains less than 20 percent of the organic plant

nutrients needed to meet our current food production needs. Therefore, through the

scientific application of manufactured fertilizers, farmers are meeting the challenge of

the future, today.

Another component of plant DNA is phosphate, which helps plants to usewater efficiently. It also helps to promote root growth and improves the quality of

grain and accelerates its ripening. And potassium, commonly called potash, is

important because it is necessary for photosynthesis, which is the production,

transportat ion and accumulation of sugars in the plant. Potash makes plants hardy and

helps them to withstand the stress of drought and fight off disease.



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Fertilizer Types:

Because every crop is different and the soils and weather conditions crops are

grown in vary dramatically around the world, commercial fertilizers, which are

manufactured from natural sources, come in many formulations.

Combining air with hydrogen using natural gas as the feedstock makes

ammonia, the building block for nitrogen fertilizers. Ammoniated phosphates, which

include mono ammonium phosphate (MAP) and diammonium phosphate (DAP), are

made by reacting ammonia with phosphoric acid. Muriate of potash, also called

potassium chloride, is made from mine ores that have been processed to remove

naturally occurring salts.

Ammonium nitrate is a solid fertilizer containing approximately 34 percent

nitrogen that is water soluble and used in various fertilizer solutions. Aqua ammonia

is another nitrogen-based fertilizer made by combining ammonia with water. It

contains up to 25 percent nitrogen and is either app lied directly to the soil or is used to

manufacture phosphate fertilizers.

Nitrogen solutions are water solutions of ammonia, ammonium nitrate and,

sometimes, urea, a solid fertilizer containing approximately 45 percent nitrogen, and

other soluble compounds of nitrogen. Nitrogen solutions are used in ammoniating

super phosphate, the manufacture of complete fertilizer and for direct injection into

the soil. They vary in composition and nitrogen content and are sometimes applied

under pressure.

NITROGEN (N):

Nitrogen is a part of all plant proteins and is a component of DNA and RNA ±

the ³blueprints´ for genetic characteristics. It is necessary for plant growth andchlorophyll production. Nitrogen is the building b lock for many fertilizers. Where

does N come from? Nitrogen is present in vast quantities in the air, making up about

78 percent of the atmosphere. Nitrogen from the air is combined with natural gas in a

complex chemical process to make ammonia.



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PHOSPHOURUS/PHOSPHATE (P):

Phosphorus as a nutrient is sometimes most valuable to plants when put near

the seed for early plant health and root growth. Plant root uptake is dependent on an

adequate supply of soil P. Phosphorus is relatively insoluble in water. The water in

most soils must replace all of the P in the soil water 2 to 3 times each day to meet the

crop¶s demand for P. Phosphorus compounds help in directing where energy will be

used. Phosphorus compounds are needed in plant photosynthesis to ³repackage´ and

transfer energy. Phosphate is also a component of DNA, so it is one of the building

blocks of genes and chromosomes. Phosphorus is involved in seed germination and

helps plants to use water efficiently. Where does P come from? Phosphorus occurs in

natural geological deposits. Deposits can be found in the U.S. and other parts of the

world.

Potassium/Potash (K):

Potassium protects plants against stresses. Potassium protects plants from cold

winter temperatures and helps them to resist invasion by pests such as weeds and

insects. Potassium stops wilting, helps roots stay in one place and assists in

transferring food. Potassium is a regulator. It activates plant enzymes and ensures the

plant uses water efficiently. Potassium is also responsible for making sure the food

you buy is fresh. Where does K come from? The element potassium is seventh in

order of abundance in the Earth¶s crust.

Through long-term natural processes K filters into the oceans and seas. Over

time, these bodies of water evaporate, leaving behind mineral deposits. Although

some of these deposits are covered with several thousands of feet of earth, it is mined

as potash or potassium chloride. Potash ore may be used without complex chemical

conversion; just some processing is necessary to remove impurities such as commonsalt.



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INDUSTRY PROFILE FOR NFCL:

AMMONIA PROCESS The feed stock natural gas is disulphurised by conversion of stable organic sulphur

compounds into Hydrogen Sulphide in presence of Nickel Molybdenum catalyst

followed by adsorption of Hydrogen Sulphide on Zinc Oxide bed. The desulphurised

natural gas is mixed with super heated steam to give steam to Carbon ratio of 3.3:1,

preheated and fed to the catalyst tubes in Primary Reformer. The Primary Reformer

is a side-fired furnace with radiant burners. The natural gas, which is predominantly

methane, undergoes following reactions producing Hydrogen and Carbon Oxides:

CH4 + H2O ------------- 3 H2+ CO - heat

CO + H2O ------------- CO2 + H2 + heat

The process gas from the tubes is gathered by a collector system and sent to the

Secondary Reformer.

The Secondary Reformer is a refractory lined vessel containing Nickel catalyst. Air

from atmosphere comes in contact with the process gas from Primary Reformer.

Combustion of some part of Hydrogen and Met hane occurs consuming the total

oxygen in the air and the temperature rises to about 1300 deg. C. This supplies the

heat needed for completion of the endothermic reaction in the catalyst bed. Nitrogen

needed for ammonia synthesis gets introduced in to the system in the Secondary

Reformer through the process air. The gas leaving Secondary Reformer contains

residual Methane of 0.6%. The exit gas from Secondary Reformer is cooled to about

380 deg. C in the Waste Heat Boiler where high -pressure steam is generated.

The carbon monoxide formed in the reforming step is converted to CO 2 by water gas

shift reaction in two stages, namely, high temperature shift conversion and low

temperature shift conversion. The HT shift reaction takes place in presence of iron

oxide chromium oxide catalyst and LT shift reaction takes place in presence of



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copper oxide zinc oxide catalyst. The shift conversion reaction being exothermic,

steam is produced by heat recovery.

The reaction-taking place in the shift conversion can be represen ted as:

CO + H2O --------- CO2 + H2 + heat

The process gas leaving the CO conversion step contains in addition to Hydrogen

and Nitrogen, large quantity of CO 2 and small quantities of CO, Argon and Methane.

The CO2 present in the process gas is removed in the CO 2 removal section using

Giammarco Vetrocoke process.

Here, CO2 absorbed in potassium Carbonate solution is regenerated by reducing the

pressure and addition of heat in two stage regenerators.

The regenerated solution is pumped back to the absorber. Thus, the system

operates in closed circulation. The CO 2 gas stripped from the solution in the

regenerators is cooled and sent to Urea plant.

The process gas exit absorber now contains only traces of CO and CO 2. Since

carbon oxides act as poison to the ammonia synthesis catalyst, the residual carbon

oxides present in the process gas are converted into methane in a methanator

reactor containing nickel catalyst. This step is the reverse of reforming reaction and

consumes a small amount of hydrogen.

The methanator exit gas after cooling and removal of condensate is the synthesis

gas with some inert. This gas is compressed from 24 Kg/Cm 2g to 134 Kg/Cm2g in a

centrifugal syn gas compressor. Also, there is a recirculation stage in the

compressor where the recycle of unconverted gas along with the compressed make

up gas are further compressed to about 142 Kg/Cm2g. This gas after pre-heating is

admitted to ammonia synthesis converter containing promoted iron catalyst, where

Hydrogen and Nitrogen combine to form ammonia with evolution of heat. The

ammonia synthesis reaction is:

N2 + 3 H2 ------------- 2 NH3 + heat



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The gas from the converter is cooled in a series of heat exchangers including a

Waste Heat Boiler. The condensed ammonia is separated and the uncondensed

gases are recirculated back to the converter via the recirculator compressor. The

product ammonia is cooled to a temperature of -33 deg. C by means of ammonia

refrigeration system. The inerts level in the synthesis loop is kept low by taking an

inerts purge and sending the same to the purge gas recovery unit where ammonia

and Hydrogen are recovered and the remaining off gas is used as fuel. The product

ammonia is pumped to the ammonia storage tanks or directly to Urea Plant.

PROCESS FLOW DIAGRAM AMMONIA PLANTS

Steam

Final De-sulphurisation

Pre-Reformer

PrimaryReformer

SecondaryReformer

HT ShiftConvertor

LT ShiftConvertor

RefrigerationSystem

CO2 Stripper

CO2 Absorber

Chilling AmmoniaConvertor

Syn. GasCompressor

Methanator

PGR Unit

GV Solution

CO2 to

Urea Plant

Prod. H2

Liquid Ammonia

Product

Air

Natural Gas



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U REA PLANT The production of Urea requires ammonia and CO 2 as the inputs, both of which are

available from Ammonia plant. The CO 2 from ammonia plant is compressed to about

160 Kg/CM2

and sent to the Urea Reactor. Liquid Ammonia is pumped using high -

pressure reactor feed pump and along with recycle carbamate enters into Urea

Reactor. Urea Reactor operates at about 156 Kg/CM2 and 188 deg. C. Following

reactions take place in the Urea Reactor:

2 NH3 + CO2 -------- NH2COONH4 (Ammonium Carbamate) +

heat

NH2COONH4 ----- CO (NH2)2 + H2O ± heat (Urea)

The product stream from the Urea Reactor contains in addition to Urea, large

quantity of unconverted ammonia, CO2 and water. The ammonium carbamate in the

product stream is recovered in three stages viz., high pressure stage, medium

pressure stage and low pressure stage by decomposing the carbamate into

ammonia and CO2, separating the gases from the liquid product stream and

recondensing the gases back to carbamate solution which is recycled back to the

Urea Synthesis Reactor. In this process, the product stream becomes richer and

richer in the urea content. In the high -pressure section, separation of Ammonia and

CO2 in the falling film of liquid in the tubes is stripped by ammonia vapour. Medium

pressure steam supplies the required heat. As the Urea Reactor operates with

excess ammonia, the excess ammonia is recovered in ammonia condenser. The

product stream leaving the low-pressure section contains 70% Urea. This is further

concentrated in the vacuum concentrators to get 99.8% Urea melt. This molten Urea

is pumped to the top of urea prilling tower and fed into a prilling bucket. The prilling

tower of 22-M diameter and 75 M free fall height operates under natural draft. The

Urea Prills from the bottom of the prilling tower are transported through mechanized

belt conveyor system into urea storage silo or directly to urea bagging plant. The

bagged urea is dispatched by rail wagons/road trucks.

Tail Gas as Fuel



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Process Flow Diagram for U rea Plant

PROCESS FLOW DIAGRAM U REA PLANTS

AmmoniaReceiver

NH3 Condensor

MP Absorber

CO2 Compressor

CO2

HP Condensor

MP Condensor

LP Condensor

Waste Water Section

Vacuum Conc.Section

LP Decomposer

MP Decomposer

Stripper

Urea Reactor Ammonia

Treated Water toDM Plant for reuse

Urea Melt

Water Vapor

NH3, CO2, H2O,Vapor

NH3, CO2, H2O,Vapor

NH3, CO2, H2O,Vapor

Passivation Air

Urea Solution

Prilling

Product Urea toBagging Plant



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PROCESS DESCRIPTION OF

CARBON-DI-OXIDE RECOVERY (CDR) PLANT

Technology Supplier: Mitsubishi Heavy Industries (MHI), Japan.

CO2 Absorbent: KS-1 Solution, Proprietary Supply from MHI, Japan.

The Flue Gas from Primary Reformer enters the Flue Gas Quencher, where it is

cooled to 40°C. The Flue Gas is compressed to a pressure of 1.113 Ksca and enters

the CO2 Absorber. The CO2 in Flue Gas is absorbed by KS-1 Solvent, which is

distributed from top through packed bed system. Subsequent to contact with KS-1

Solution the Flue Gas is further washed with DM Water in the top section of CO2

Absorber. The Flue Gas after removal of CO 2 is sent out to atmosphere through a

stack provided at CO2 Absorber top. The CO2 rich solution at 55°C is pumped to the

Lean / Rich Heat Exchanger. The Lean Solution is recycled back to CO 2 Absorber.

The rich solution stream is heated up to 114 °C and sent to CO 2 Regenerator,

wherein CO2 is stripped off from rich solution by providing necessary heat to Reboiler

using Low Pressure Steam. The CO 2 thus liberated is washed with DM water at the

top of CO2 Regenerator, cooled to ambient temperature in an overhead condenser

and sent to Urea Plants.



32

SCHEMATIC DIAGRAM OF CDR PLANT

ADVANTAGES OF CDR PLANT

CDR Project reduces the flue gas temperature from 175 deg. C to 50 deg. C

and 450 MTPD of CO2 venting to the atmosphere will be reduced .



33

FOOD FOR THE GROWING WORLD

Industry at a glance:

Since 1883 the industry has worked to promote the advances in the

development and application of fertilizers that have helped to feed a hungry world.

The revolutionary concept of plant nutrition was born from the discovery of the

biological role of chemical elements in plant nutrition and the need to feed a growing

population concentrated away from the farm in the rising industrial centers of the

world.

Because of modern fertilizers, world food production since 1960 has more than

doubled, keeping pace with the population explosion. Today, the fertilizer industry is

poised to help produce the food that will be needed to feed the world¶s projected 9

billion people in 2025.

The fertilizer industry is essentially concerned with the provision of three

major plant nutrients ± nitrogen (N), phosphorous (P) and potassium (K) ± in plant

available form. Each nutrient is responsible for different aspects of plant growth and

health.

Fertilizers:

Regulated for quality and safety like other manufactured goods, fertilizers are

regulated for quality and safety at the federal and state levels. Every state in the

country, plus Puerto Rico, has its own fertilizer regulatory program, usually

administered by the state department of agriculture.

State Regulation:

State regulation is concerned with consumer protection, labeling, the protection

of human health and the environment, and the proper handling and application of

fertilizers. Fertilizers are regulated at the state level because soil conditions vary

dramatically from state to state across the country. For example, the rocky, thin soils



34

of New England are vastly different from the deep, rich black soils of the Midwest

Corn Belt. A different level of fertilizer nutrients in the soil, different crops (potatoes

versus corn, for instance) and different weather and cropping patterns require state-

specific regulation.

Where Science and safety come first the modern commercial fertilizer industry

was founded on the revolutionary scientific discovery in the last part of the 18th

century that chemical elements play a direct role in plant nutrition. This initial

concept was supported by direct scientific experiment and opened the way for

industrial-scale manufacturing of fertilizers of all types in the 19th

century, beginning

with superphosphate in 1843. This was followed by ammonium Sulphate, sodium

nitrate and, finally, in the first two decades of the 20th

century, the manufacturing of

synthetic nitrogen fertilizers directly from atmospheric nitrogen.

Assessing Fertilizer Safety:

Fertilizer research and development historically have been focused on

maximizing economic crop yields from given rates of nutrient application. Since the

advent of the modern environmental movement in the 1960s, research has also been

concerned with minimizing potentially adverse human health and environmental

effects from fertilizer manufacture and application.

As part of its continuing commitment to safety, in 1996, the Fertilizer Institute

initiated a comprehensive safety assessment project to determine the risks, if any, of

metals in fertilizer. Small amounts of metals are found in phosphate and potash

fertilizers due to their presence in the mined ore bodies. In addition to phosphate and

potash products, some micronutrient fertilizers, which come from both mined ores and

recycled wastes, also contain metals.

Fertilizers Enrich our World:



35

Improvements in agricultural efficiency through research and technology

increase food output while protecting the environment and enriching our world in

numerous ways.

Fertilizers feed the growing world. As the world¶s population continues to

climb toward an estimated 8.5 billion in 2040, experts estimate that food production

must increase more than two percent annually to even maintain current diets.

Commercial fertilizers will be the key in the fight to feed the growing world.

Fertilizers protect the environment. The efficient use of fertilizer also helps to

conserve the natural environment. With fertilizers and modern high yield farming

practices, more food is produced per acre each year, so land may be conserved.

Fertilizers, used properly, help to prevent the widespread loss of habitat that results

from wasteful ³slash and burn´ low-yield farming, which is a major global

environmental threat.

Fertilizers at work in industry:

Aside from their benefits to agriculture, fertilizer components are central to

such industrial process as semiconductor chip making, resin manufacture, cattle feed

production, metal finishing, the manufacture of detergents, fiberglass insulation and

more, even rocket fuel.

Global Fertilizer Consumption



36

Major Fertilizer Producing Countries:

Million metric tone, years ending June 30*

(Metric Tone)

COUNTRY 2005-06 2006-07 2007-08 2008-09 2009-10

Nitrogen

China 20.2 21.5 22.8 21.5 22.1

India 10.1 10.5 10.9 10.9 10.7

United States 13.8 13.5 11.2 9.9 10.6

Russian

Federation4.1 4.1 5.0 5.4 5.5

Canada 3.7 3.7 4.1 3.9 3.5

Phosphate

United States 9.0 9.0 8.5 7.3 7.6

China 6.4 6.7 6.4 6.7 7.4

India 3.0 3.2 3.4 3.7 3.9

Russian

Federation1.9 1.7 2.0 2.3 2.4



37

Brazil 1.4 1.4 1.4 1.5 1.4

Potash

Canada 9.0 9.2 8.2 9.2 8.2

Russian

Federation3.4 3.5 4.0 3.7 4.3

Belarus 3.3 3.4 3.6 3.4 3.7

Germany 3.4 3.6 3.5 3.4 3.5

Israel 1.5 1.7 1.7 1.7 1.8

Source: Food and Agriculture Association (FAO) andThe Fertilizer Institute (TFI)* For countries that report their fertilizer statistics on a

calendar-year basis, data are shown under the fertilizer year that begins in thatcalendar year; for example, 2005 data are under 2005/06 data are under 2005/10.



38



39

Major Fertilizer Consuming Countries:

In million metric tone, years ending June 30*

(Metric tone)

COUNTRY 2005-06 2006-07 2007-08 2008-09 2009-10

Nitrogen

China 23.0 22.9 24.1 22.1 22.5

India 11.0 11.4 11.6 10.9 11.3

United

States11.2 11.3 11.2 10.5 10.9

France 2.5 2.5 2.6 2.3 2.4

Pakistan 2.1 2.1 2.2 2.3 2.2

Phosphate

China 9.3 9.4 9.0 8.7 8.9

India 4.0 4.1 4.8 4.3 4.3

United

States4.2 3.9 3.9 3.9 4.20

Brazil 2.0 2.0 2.0 2.3 2.5

Australia 1.1 1.0 1.1 1.1 1.2

Potash

United

States4.8 4.5 4.5 4.5 4.5

China 3.4 3.5 3.4 3.5 4.0

Brazil 2.4 2.3 2.2 2.6 2.7

India 1.4 1.4 1.7 1.6 1.7

Source: Food and Agriculture Association (FAO) and

The Fertilizer Institute (TFI)*For countries that report their fertilizer statistics on a calendar-year basis, data are

shown under the fertilizer year that begins in that calendar year; for example, 2004 data are under 2005-2010



40



41

COMPANY PROFILE

THE NAGARJUNA GROUP

Our founder Sri K.V.K. Raju (28.11.1928 ² 16.06.1993) laid the

foundation of the Nagarjuna Group in 1974 with an investment of Rs. 50

millions. He was a visionary and a professional technocrat entrepreneur

who realized the importance of Core Sectors to an economy like ours. He

has guided the group with his philosophy

SERVING SOCIETY THROUGH INDUSTRY

Nagarjuna Fertilizers and Chemicals Limited (NFCL) is the first gas

based fertilizer factory in South India. The plant is based on the latest

fertilizer technology from M/s. Snamprogetti, Italy for Urea process with an

installed capacity of 1500 Mt/day for each unit. The ammonia process is

based on technology from M/s. Haldor Topsoe, Denmark with an installed

capacity of 900 MT/day per each unit.

The feed stock for unit ² I is natural gas and feed stock for Unit ² II is

NG/Naphtha. The current consumption of natural gas is 2.15 million

standard cubic meters per day and 500 MT of Naphtha per day. The naturalgas is being received through pipe lines from Tatipaka situated 92 Kms away

from the factory and is marketed by M/s Gas Authority of India Limited.

Naphtha is being supplied by M/s HPCL. The water requirement of 6.0

Million Gallons/day is received from Samalkot Summer Reservoir thro ugh

two pipeline.



42

Finance:

The total cost of the existing complex is Rs. 2156 crores (Rs. 1186

crores for Unit-I and Rs. 970 crores for Unit ² II). This consists

of loan of Rs. 1,162 crores (Rs. 515 crores for Unit-I and Rs. 647 crores for

Unit ² II) sanctioned by IDBI, IFCI, ICICI, UTI, LIC, GIC and also Banks.

The foreign exchange component of Rs. 781.07 cores was met by the Indian

Financial Institutions like IDBI, IFCI & ICICI and also by Italian Buyers

credit.

LIVING IN HARMONY WITH NATURE ± NFCL¶S

CONTRIBUTION TO ECOLOGY

Environmental protection is an avowed corporate philosophy and the

plant is built on the principle of zero-effluent discharge and is totally eco-

friendly. NFCL·s aim is to maintain ecological harmony, which is NATURE·S

INVALUABLE AND BEAUTIFUL GIFT TO MANKIND.

Man can live in harmony with the environment only when mankind is

guided by respect for the Mother Earth and all living things. Nagarjuna

Fertilizers and Chemicals Limited believe that Industry should exist in

harmony with nature. In pursuance of the corporate vision, and as a

humble contribution to the Mother Nature, the complete ecological system

in and around the factory has been changed by establishing a K.V.K.RAJU

SUNDARAVANAMU in an area of 747 acres surrounding the Complex.



43

The entire area has been covered with 4,50,000 plants consisting of 170

species, transforming a once highly saline marshy area devoid of any

vegetation into a lush green arboreal park. The establishment of 1 KM wide

KVK Sundaravanam is an integral part of overall natural ecological system

consisting of eleven water bodies for fish, habitat for animal life and

sanctuary for both indigenous as well as migratory birds with the factory

nestled in the most natural and idyllic surroundings cre ated with

dedication.

An integrated Environmental Management Plan (EMP) has been

incorporated in the basic design itself to ensure strict adherence to

International Standards. The investment on pollution control equipment in

the Plant is close to Rs. 110 crores of capital investment

and recurring expenditure of Rs. 6 crores being spent annually for operating

and maintaining the equipment.

MAIN FEATURES OF ECO-SYSTEM:

A forestation:

740 acres of area has been planted with 4.5 lakh saplings of 170

species. Weak areas have been planted with selected species based on

criteria like tolerance to salinity, availability from local sources and their

ability survive with least maintenance. A full -fledged nursery with mist

chamber and sprinkler irrigation system has been developed for supply of

plants to a forestation programmed .

Animal Enclosures:

A deer park with spotted deer has been set up in an area of six

hectares with chain-link fence on all sides. Separate enclosures for birds,

rabbits and certain other animals are made available. Some of these

animals like jungle cat, fox, jackals, mongooses, squirrels, bats, snakes, and

turtles are also being let out freely in this eco-system as a part of our animal

conservation programme.



44

Use of Treated Effluent:

The total treated effluent generated from the factory is being utilized

through a network of over 17 KM of PVC pipeline for sustenance of the eco-

system to show the purity levels of the effluents and the technological

efficiency of the plant equipment.

Awareness Programme:

As a part of NFCL·s sincere endeavor to bring awareness about the

benefits of cleaner environment on the general standards of life,

company has started ´GREENING THE ROADSµ of Kakinada in Phases. As

a part of this programme, flowering trees were planted on either side of the 4

km length of roads from Bhanugudi Junction to Nagamallithota and from

Nagamallithota to NFCL. This programme is being extended to further areas

in phases.



45

VALUES STATEMENT OF NFCL

COMMITMENT

We the Associates of NFCL are committed to continuously evokingcustomer delight through constant review and monitoring and delivering

proactive value added solutions. We are also committed to strive for

satisfaction of all stakeholders in a balanced manner through sustainable

growth and profitability

Excellence:

We shall continuously strive for Excellence in all dimensions of the

Company through teamwork, creativity and other means.

Ethics:

We shall strive for wholesome business relationships by adhering to

the principles of trusteeship, fair play and transparency in all our dealings

that we shall practice a work cultural, which is performance driven and

conducive to in proving discipline, accountability and depth of character,

team spirit and honesty in all our personal and professional relationships.

We shall build a learning organization where creativity, innovation,

entrepreneurship and knowledge sharing are encouraged and fostered

actively

Concern:

We consciously recognize that the development of associates is

inextricably linked to the sustainable growth and profitability of the

organization. Therefore, mutual care and concern between the associates

and the organization shall be our abiding value.



46

NFCL¶S VISION STATEMENT

SERVING SOCIETY THROUGH INDUSTRY

´For close to two decades, we at NFCL have predominantly been in the

business of manufacturing and marketing Urea, a segment of the plant

Nutrition business space. Given our cumulated experience and strengths in

understanding the farmer, the agriculture, various initiatives taken in the

past, the exposure of Indian agriculture to global economy and therefore the

need for Indian farmers to be globally competitive, have realized the need to

provide innovative and comprehensive Plant Nutrition Solutions.

´The leadership we refer to in our Vision Statement is in terms of

providing innovative and creative solutions.µ



47

NFCL¶S MISSION STATEMENT

We shall:

- Pioneer transformation in the approach to plant nutrition

- Deliver holistic plant nutrition solutions to the farmers

- Be the most preferred organization to be associated with

Pioneer transformation in the approach to plant nutrition we shall

develop crop, site and stage specific wholesome plant nutrition solutions.

NFCL shall focus on all necessary initiatives towards this ² be it

manufacturing technology, regulatory, logistics and using a mix of several

sciences and skills. The most preferred organization to be associated with in

the process of providing these solutions , NFCL shall delight all the

stakeholders ² employees, investors, suppliers, customers and society at

large. The stakeholders would prefer to be associated with us not only for

the higher value we offer, but also shall cherish their relationship with us

due to the way we deal with them ² with full commitment, responsibility and

accountability.

EMPLOYEE FOCUS:

NFCL·s aim to have the most satisfied employee base by the turn of

the century through its commitment to Personal and professional

development of the individual.

y Rewarding teamwork, innovation and quality behavior

y

Through job satisfactiony Creating and sustaining a close-knit family culture wherein every

individual experience a sense of belonging .



48

Marketing:

NFCL is operating in Andhra Pradesh, Orissa, West Bengal,

Maharastra, Karnataka, Pondicherry (Yanam territory). A professional team,

with a wide range of products, that include Urea, traded fertilizers (DAP,

MOP, Complex fertilizers), Micro-nutrients, Pesticides, Organic fertilizers

and Bio-Pesticides, has taken NFCL very close to the farmers and made

NAGARJUNA a household name among the farming community

Keeping pace with the changes in agricultural practices NFCL has

developed organic-fertilizers and bio-pesticides with support from NARDI. A

new concept in fertilizers i.e., Customized Fertilizer Granules (CFGs) has

been developed and the product is in trials.

NFCL·s Development activities focus on imparting training to farmers

and dealers on the latest package of practices in various crop sand

technology transfer. Training programs are carried out both on campus at

KVK, Kakinada and off-campus at villages and towns. A Well-equipped and

trained development tem organizes the programs using audio -visual vans,

jeeps, slide projectors and literature on products and crops, etc. State

Governments, Agriculture Universities and the farming community as awhole have acknowledged the effectiveness of development programs being

carried out by NFCL.



49

PERFORMANCE HIGHLIGHTS

YEAR PRODUCTION SALES

SALES

TURNOVER

INCLUDINGSUBSIDY

NET

PROFIT

AFTERTAX

Ammonia

(MT)

Urea

(MT)

MFG Urea

(MT)

(Rs.

Crores)

(Rs.

Crores)

1992-93

(8

months)

188027 308453 251599 364.48 32.11

1993-94 344498 591213 598787 606.51 127.86

1994-95 386357 675149 659094 843.14 192.89

1995-96 413390 708059 689767 882.27 221.18

1996-97 412694 716910 695154 922.49 155.241997-98 401627 689648 682836 795.88 122.10

1998-99 699110 1212607 1205376 1214.54 143.73

1999-00 751542 1297510 1283195 1435.96 113.50

2000-01 796024 1364794 1324497 1215.52 46.53

2001-02 706528 1221944 1217629 1062.69 39.70

2002-03 689263 1187259 1101776 748.65 57.47

2003-04 712534 1325467 1265376 1178.26 74.67

2004-05 723525 1382953 1256704 1385.63 85.35

2005-06 788471 1379220 1396927.35 1452.94 66.86

2006-07 756815 1324054 1310856.05 1815.24 31.71

2007-08 772584 1354490 1338345.95 2193.59 22.49

2008-09 782861 1378162 1397101.35 2371.90 32.41

2009-10 846533 1482103 1505484.65 1987.90 66.37



50

CUSTOMER FOCUS:

In recognition that business is based on quality and integrity, NFCL·s

aim to have the most satisfied customer base by enhancing farmer

productivity through forward integration on the one hand, and through

catering to industrial needs on the other. Unto this end, NFCL shall:

y Produce high quality products that give value for money

y Offer, both products and services

y Innovate to satisfy the real needs of customers

y Engage in fair, open and ethical practices.

SHAREHOLDER FOCUSNFCL aim to keep its shareholders satisfied by:

y Delivering the best long-term return on investment amongst all

companies in the Indian agri-business industry.

y Continuous growth and excellence in business performance.



51

AWARDS AND HONOURS

´EPICµ Award for Anti-Pollution measures taken by the Industry by

Environment Public interest Committee, Kakinada in 1993.

Good Housekeeping Award for 1994 by National Safety Council, A.P.

Chapter.

Best Industrial Canteen Award for 1994 by National Safety Council, A.P.

Chapter.

Indian Chemical Manufacturer·s Association (ICMA) Award for

´Environmental Control Strategies and Safety in Chemical Plantsµ for

the year 1994.

Award of Merit for 1994-95 by National Safety Council, U.S.A. for

completing 2 Million Accident Freeman Hours.

ISO 9002 Certification from Bureau Verities Quality International (BVQI),

Netherlands, in 1995.

Golden Peacock National Quality Award by Institute of Directors, New

Delhi, India for 1995.

British Safety Council·s National Safety Award for the five consecutive

years, 1994, 1995, 1996, 1997 & 1998 and also for the year 2000.

´Rajiv Gandhi Parti Bhoomi Mitraµ Award for 1994-96 by Wasteland

Development Board, Government of India.

National Safety Award for 1996 by National Safety Council, U.S.A.

Award for Innovative and Purposeful Programme for Social Progress for

the year 1996 by Indian Chemical Manufacturer·s Association (ICMA),

Mumbai.



52

Merit Award for 1997 and 1998 by Royal Society for the Prevention of

Accident (RSPA)

´Best Workersµ Welfare (including Family Planning) effort by an Industri al

or Commercial Unit in the Stateµ for the year 1997-98 by Andhra

Pradesh Chambers of Commerce & Industry (FAPCCI)

Golden Peacock National Award for environmental Management by World

Environment Foundation for the year 1998

Paryavarana Parirakshak Award by Rotary International at

Visakhapatnam for the year 1998

VANAMITRA ² 1999 from Govt., of A.P. for Developing and Maintaining

Greenbelt.

Achieved 84% in OH & S ² Audit conducted by British Safety Council,

U.K. in January 2000.

Best School Industry Linkage Award 2000 by NCERT ² an Autonomous

Organization of Government of India ² December 2000.

Best Environmental Management Plan ² 2000-01 in Vizag Zone by

Andhra Pradesh Pollution Control Board, Visakhapatnam.

National Safety award for 2000-01 from British Safety Council, U.K.

Best Environmental Improvement Effort by Industries located in the

State in 2000-2001 from Federation of A.P. Chamber of Commerce and

Industry, Andhra Pradesh.

Bronze Award for Occupational Safety for the year 2001 by Royal Society

for the Prevention of Accident (ROSPA), UK.



53

Commendation Trophy jointly given by National Safety Council, A.P.

Chapter & Director of Factories, A.P. for Implementing OHSAS 18001 in

March 2001.

¶ Environmental Protection Award· in Nitrogenous Fertilizer plants

category for the year 2001-02 from Fertilizer Association of India, New

Delhi.

´Perfect Recordµ in Occupational Safety/Health Award Programme for

operating two million employee hours without occupational injury or

illness for the period from 10.10.01 to 1 3.11.02 from National Safety

Council (NSC) of USA.

Commendation prize under the process stream category for its energy

conversation initiatives by Andhra Pradesh productivity council,

Hyderabad in 2007.

National award for ´Water efficient unit 2007µ by confederation of Indian

industry Hyderabad in 2007.

Certificate of Appreciation for implementing the process safety

management system (PSMS) by national safety council, A.P. Chapter,

Hyderabad in 2008.

NFCL bagged two awards from the Fertilizer Association of India (FAI),

New Delhi for the year 2008. It won the prestigious FAI Environmental

Protection Award in the nitrogenous fertilizer plants category and award

for the best article in ¶ Production and Technology·.



54

NFCL has bagged ICC AWARD for Excellence in Management of

Health/Safety/Environment from Indian Chemical Council, Mumbai for

the year 2008.

NFCL bagged two awards from the Fertilizer Association of India (FAI),

New Delhi for the year 2009. It won the prestigious FAI Environmental

Protection Award in the nitrogenous fertilizer plants category and stood

as joint winner for excellence in Safety Award.

NFCL has bagged Green Leaf 2nd runner-up award in the Global

Competition for Excellence and Innovation in Safety, Health and

Environment held by International Fertilizer Industry Association (IFA)

in 2009.



55

OTHER GROUP COMPANY / INSTITUTION

y Nagarjuna Investors Services Limited

y Nagarjuna Agric hem Limited

y Nagarjuna Palma India Limited

y

Nagarjuna Agricultural Research & Development Institute

y KVK Raju International Leadership Academy

y Nagarjuna power Corporation Limited

y Nagarjuna Haifa India Limited

y Nagarjuna Oil Corporation Limited

y Bijam Biosciences Limited

y Nagarjuna Foundation



56

FUTURE PLANS OF THE COMPANY

1) To improve the capacity utilization and energy efficiency through

technology up gradation.

2) Switching over to 100% natural gas as raw material instead of

Naphtha in Ammonia plant II

3) To continue to improve environmental performance under the

framework of ISO 14000 ² EMS.

4) To achieve British Safety convenience sword of honor in safety

management.

5) To enhance the standards in the present quality management system

(ISO 9002) by adopting the ISO 9001-2000 revision.

6) To enhance the standard in the present quality management system

(ISO 9002) by adopting the ISO 9001-2000 revision.

7) To widen the scope and offer technical services to various external

agencies including overs as a excitement .



57

Diversification:

Nagarjuna Group is on the threshold of major growth phase. Nagarjuna·s

aim is not just to meet the challenges of change, but to be the leaders in

all the businesses that we are in namely, Agri Inputs/Outputs, Energy

Sector and Refinery. Nagarjuna Group will thus have significant presence

in the core sectors of the economy, which will have a multiplier effect on

the industrial and socio-economic development of the country.

Nagarjuna Fertilizers and Chemicals Limited (NFCL) has sought the Center·spermission to expand the existing production capacity of urea from 12 lakh

metric tones per annum to 17 lakh tones per annum, reports Business

Standard.

NFCL is also undertaking several activities for the development of the

surrounding villages by providing free medical, educational and drinking

water facilities besides supporting the mental ly-retarded children.

The Kakinada facility of Nagarjuna Fertilizers and Chemicals Limited

(NFCL), has achieved a record Urea production of 113.1%, producing a total

of 13.79 lakh Metric Tonne of Urea during 2005-06. The Plant has repeated

this phenomenal feat, producing Urea more than its capacity, for the

consecutive second year. NFCL produces Urea in two units. While the Unit

one Produced 7,03,645 Metric Tonne, unit two also surpassed its capacity

by producing 6,75,571 Metric Tonne making this phenomenal feat repeated

during 2005-06 too. Total capacity of the plant is 11,94,600 Metric Tonne.



58

The Plant also has achieved this record production at a very

optimal utilization of energy of 5.662 MKcal/MT of Urea against

Internal target of 5.67 McCall/MT, which is already much lower than

the standard Fertilizer Industry Coordination Committee·s (FICC)

norm of 5.712 MKcal/MT. NFCL has one more reason to celebrate that

full production of Urea i.e., 13.79 lakh Metric Tonne has been

dispatched to the farmers.

Along with the production, NFCL has also done well in sales and

distribution wings. It·s products, which include Mahazinc, Zinc Sulphate,

zeta specialty fertilizers besides Urea have been sold out during 2005 -06.

NFCL WINS GAS CONSERVATION AWARD FROM GAIL:

Fertilizer facility of Nagarjuna Fertilizers and Chemicals Limited in

Kakinada has been selected for the ¶Award for Excellence in Natural Gas

Conservation· in the ¶ Fertilizers Sector· category for it·s outstanding

contribution to natural gas conservation in the country during 2004 -05.

This annual award has been instituted by Gas Authority of India

Limited (GAIL) as recognition of the excellent work done by the o rganizations

in Gas Conservation. GAIL has been conducting a nation -wide Natural Gas

Conservation Programme, meant to spread the word of conservation of this

precious natural resource. All the natural gas using industries like power,

fertilizer, steel, sponge iron, transport, glass, ceramic and petrochemicals

would be considered for this award.

This is the 4th achievement of NFCL for it·s excellence in different

departments during 2005. these include; 5 star rating in O.H & S Audit

from British Safety Council, UK. Commendation Award in ´Leadership and

Excellence Awards in Safety, Health & Environment (SHE) 2004µ, by

Confederation of Indian Industry,



59

Southern Region, Chennai. Re-certification for ISO 9001:2000 by

Bureau Verities Quality International (BVAI) for quality management

systems. And NFCL also received Environment Protection Award from

Fertilizers Association of India.

NFCL wins the prestigious Environment Protection Award from the

Fertilizer Association of India

Nagarjuna Fertilizers and Chemicals Limited (NFCL) the flagship

company of the Nagarjuna Group has won the prestigious FAI (Fertilizer

Association of India) Environment Protection Award in the Nitrogenous

fertilizer plants category for the year 2004-05. NFCL had

won the same award for 2001-02 also. Going much beyond the statutory

requirements of law for environment protection, NFCL has implemented a

comprehensive protection plan in its plant at Kakinada. NFCL has been

widely acknowledged for its Commitment to the betterment of Environment

and this award further adds to the long list of recognition.

NFCL has also won two more awards from FAI. A video film titled

´The Sugarcaneµ produced by NFCL was adjudged Runner-up in the Annual

Video Film Competition by FAI for the yea r 2004-05. The video film has

been developed with the objective to transfer technology and to enhance the

yield of sugarcane farmers in Andhra Pradesh. For NFCL, this is the second

consecutive year of winning in this category. An article titled ´From

Products to Solutions ² Exploring Opportunitiesµ published in the

September 2005 issue of the Indian Journal of Fertilizers was awarded the

Second prize in the category of Shriram Award for Best article in Marketing.



60

Bureau Verities Quality International (BVQI) awards re-

certification of ISO 9001:2000 for Nagarjuna Fertilizers and

Chemicals Limited.

Nagarjuna Fertilizers and Chemicals Limited (NFCL) have been re -

certified of ISO 9001:2000 by Bureau Verities Quality International (BVQI),

for its Quality Management Systems. The Flagship Company of the

Nagarjuna Group has already been an ISO 9001:2000 organization since

1995. This re-certification, which is valid up to February 2008, is only an

extension of recognition for company·s excellent quality management

systems.

BVQI team has done the re-certification audit during February at NFCL

plant Kakinada. After conducting audit in Plant Operations and Area

Marketing Offices BVQI sent a certificate to NFCL in which it mentioned

´Quality Management System of the Nagarjuna Fertilizers and Chemicals

Limited has been audited and found to be in accordance with the

requirements of the standards ISO 9001:2000µ.

BVQI is today the most widely recognized certification body in the

world, offering solutions in the key strategic fields of companies operations:

Quality, Health and Safety, Environment and Social Responsibility. It is

recognized by more than 30 national and international accreditation bodies

across the world to deliver ISO 9001 certification.

Nagarjuna Fertilizers and Chemicals Limited Awarded the

prestigious 5 star Rating by the British Safety Council, U.K

:Nagarjuna Fertilizers and Chemicals Limited (NFCL), the flagship

company of the Nagarjuna Group has been awarded the hi ghly coveted 5

star rating by the British Safety Council, U.K. After a detailed Health and

Safety Management System Audit conducted during the month of January

2005, the British Safety Council has awarded an ¶ Excellent· rating (Score of



61

92.39%) to NFCL·s manufacturing facility at Kakinada. The audit covered

eight areas of NFCL·s management systems leading to best practices, Fire

Control Systems, Measurement and Control Systems, Workplace

implementation, Verification, Best practice and Continuous improveme nt.

The British Safety Council (BSC) is one of the world·s

leading occupational health, safety and environmental organizations. BSC·s

Five Star Health and Safety Management System Audit is a benchmark for

best practices. It provides a detailed examina tion of the organization·s

current practices, and gives a comprehensive report and plan for

implementing, monitoring and achieving continuous improvement.

It is based on the Business excellence Model and goes beyond HS(G)65 and

OHSAS 18001 to measure how far an organization has gone towards

achieving best practice.

Information Technology & Communications Department,

Government of Andhra Pradesh signs MoU with IKisan Limited

To provide Agriculture related information and services through

Rajiv Internet Village Centers / (RSDPs/Rural eSeva Centers)

In its efforts towards Grameen Vikas aimed at alleviating rural poverty

and ensuring agricultural development, the Information Technology &

Communications Department, Government of Andhra Pradesh today signed

a MoU with Ikisan Limited to provide agricultural related information and

services to the vast farming community of the state through Rajiv Internet

Village Centers (RSDPs/Rural eSeva Centres).

The Information Technology and Communications Department has

already set up 1200 kiosks spreading across the state under the Rural

Service Delivery Point Project (RSDP) in rural areas to serve as centers of e -

commerce and information dissemination. Ikisan Limited has partnered

with the Information Technology & Communications Department to provide

agriculture information software and services in these kiosks. The modules



62

will be in Telugu and voice enabled addressing the needs of rural population

comprising mainly of farmers. The kiosk operators will be provided trai ning

by Ikisan Limited enabling them to effectively utilize the software and other

applications for the benefit of agriculturists.

Ikisan Limited is a pioneer in Agri-Portals in India. A Nagarjuna Group

initiative, Ikisan.com is a comprehensive Agri Port al addressing the

Information, knowledge and business requirements of various players in the

Agri arena viz., Farmers, Trade Channel partners and Agri Input/Output

companies. Leveraging Information Technology and extensive field presence,

Ikisan is positioned as an Information/Output companies. Leveraging

Information Technology and extensive field presence, Ikisan is positioned as

an Information/Knowledge exchange and an e-Marketplace. An integrated

agriculture group, Nagarjuna has core competencies in t he fields of plant

nutrition, plant protection, irrigation and farm services.

Our Values:

Deliver solutions that will please our customers deliver returns that

motivate out investors take actions that strengthen us and inspire the best

in others (by setting an example in relationship, integrity, honesty, humility

and hard work)

By understanding the deep and fundamental needs of our people, our

customers our Investors and our Ecosystem (Alliances, Community and

Environment).



63

The Group:

Founded in 1973 by Shri K.V.K. Raju with a modest investment of

US$ 23 million, the Nagarjuna Group Today is a prominent industrial house

in India with an asset base of US$ 2.5 billion.

1974: Birth of a business group that pioneered several core sect or

enterprises in the coming decades. Starting with manufacturing steel,

Nagarjuna Steels Limited was launched.

1985: With focus on agriculture input business started plant

nutrition business with Nagarjuna Fertilizers and Chemicals Limited

1992: Forayed into the Crop Protection Business with Investments in

Pesticide Formulations manufacturing followed by Technical Grade

Manufacturing in the year 1994.

1994: Micro irrigation business started to address the irrigation

problems of farmers living in water and energy scarce regions.

1995: Ventured into Energy Sector. Entered into power generation by

setting up Nagarjuna Power Corporation Limited.

1997: Entered into petroleum by setting up Nagarjuna Oil

Corporation Limited.

Consolidating its core activities, today the Group·s major operations cover

Agri and Energy sectors.



64

The new corporate logo of the

Nagarjuna Group symbolizes a

dynamic and value-based

organization, actualizing the

concept of Trusteeship.

The logo exemplifies the Group·s

inner strength through the

circles, which stand for the core

values of the organization viz.,

concern, commitment, quality

and integrity towards its

stakeholders viz., customers,

employees, investors andcommunity. The central circle

symbolizes the Sun, the source

of prime energy for the solar

system. The five circles also

symbolize the five elements of

the Universe and the spirit of

continuity.

The triangle represents

the planet Mars. Mars, from

time immemorial has

symbolized prosperity, success

and abundance of energy. The

triangle in the logo represents

the upward flow of perennial

energy towards the mission of

the group ´Serving Society

through Industryµ



65

WELFARE MEASURES IN NFCL:

It has taken several welfare measures to improve the general working

conditions. They are given below.

A.C. Facilities

Drinking Water Facilities

Lockers given to employees for keeping their belongings

Annual Medical Examination

First Aid Boxes at several locations

Cultural Activities

Library Facilities

School for children of NFCL employees

Employees State Insurance Facilities

Uniform to all Employees

Group·s savings linked Insurance Scheme

Protective wear like helmets

Transport facilities

Canteen facilities

Housing Loan facilities



66



67

NFCL OBJECTIVES:

Performance management

High performance potential

Individual growth potential

Belief in Youth

High Result Orientation

Law procedure orientation

Entrepreneurial Development

Distinct Nagarjuna Group Ethos

High sense of respect for value of time and money Harmonious

employee relations

Development of Human Resources on a continuous basis

Highest importance to human values

Objectives assessment of individual performance

Disciplined behavior of all employees

Belief in system management

Belief dynamism

Belief in multi skilled concept

Continuous monitoring cost control



68

SWOT ANALYSYS:

1. STRENGHTS: A broad and modern product range good corporate

image especially in Andhra Pradesh excellent dealer network in most

of the other states open work culture and good working environment

qualified trained and motivated team quality assurance system ISO ²

9000 location advantage of plant.

2. WEAKNESSES: Broad product range is not synergies yet. In adequate

information system and coordination between area offices and lead

offices. In adequate marketing database/market information.

Procedural bottlenecks some complacency about market retention.

Inadequate reporting systems.

3. THREATS: Decontrol, Joint ventures, International cartels. No

availability of raw materials in future.

4. OPPORTUNTIES: Huge gap between usage outside and inside India.

Expansion object offering double the quantity. New irrigation projects

increasing the demand.



69



70

THEORETICAL BACKGROUND OF

INVENTORY MANAGEMENT

Introduction:

Inventory management is very important in an organization in order to have a

smooth move of it. The term inventory refers to the stockpile of the products a firm is

offering for sale and the components that will be sold in future in the normal course of

business operations .Inventory as a current asset differ from other assets because only

financial managers are not involved, rather all functional areas finance, marketing,

production and purchasing also involved. The view concerning the appropriate level

of inventory would differ among the different functional areas. The job of the financialmanagers is to reconcile the viewpoints of the various functional areas regarding the

appropriate inventory levels in order to fulfill the overall objective of maximizing the

owner¶s wealth. Thus, inventory management should be related to the overall objective

of the firm. The basic responsibility of the financial manager is to make sure the firm¶s

cash flows are managed efficiently. Efficient management of inventory should

ultimately result in the maximization of owner¶s wealth.

Objectives of inventory management:

To meet the demand for the product by efficiency organizing the

production the production and sales operations.

To minimize investments in inventory.

To ensure against delays in deliveries.

To utilize the advantage of price fluctuations.

To take advantage of quality discount.

These Objectives can express in terms of cost and benefit association with inventory.

Inventories provide benefits to the extant that they facilitate the smooth functioning of

the firm.

Need to hold inventories:

Management inventories involve typing up of company¶s funds and incurrence

of storage and handling costs. There are three general motives for holding inventories.



71

Transitive motive emphasizes the need to maintain inventories to

facilitate smooth production and operations.

Precautionary motive necessities holding of inventories to guard

against the risk of unpredictable changes in demand and supply forces and other

factors.

Speculative motive influences the decision to increase or reduce

inventory levels to take advantage of price fluctuations.

Nature of inventories:

Inventories are stock of product a company is manufacturing for sale and

components that make up the product. Inventories are composed in to:

Raw materials

Work in progress

Finished goods

Consumables

Bought out components

Packing materials

Spare parts

Raw materials:

Raw materials are those items purchased to be processed and are the major input into an organization and from the bulk which gets converted into output. The

function of raw materials is to act as a buffer between procurement and manufacturing.

There are two important factors:

Internal factors

External factors



72

Internal factors:

y Production technology

y Criticality of the item

External factors:

y Lead time (administrative and suppliers)

y Vendors relations

y Availability of materials

y Government policy

y Seasonally

y Credit situation and govt.restriction

Consumables:

There are the materials which act as µcatalyst¶ in the production process and not

directly found in the end product. These enable the production process to function

smoothly. The inventory level of these consumables can be fixed based on the past

consumption.

Bought components:

Organizations especially those in consumer goods and engineering industry do

not always produce 100% of their out put from raw materials. At times they find it

chapter and more convenient to buy from regular vendors. This enables them to

concentrates more convenient to buy from regular vendors. This enables them to

concentrates more on critical parts and assembly.

The important factors that influence the bought components are:

Make or buy decisions

Source development

Vendor relations

Perfuctual inventory system



73

Make or buy decisions must be taken after through ³tech economic analysis´.

Source development is laborious and consuming more if the unit is located in

backward area (or) region.

Vender relations are built up over the years depending up on the quality, regularly or

supply and financial transactions. Usually vendors operate at much smaller level.

Work- in -progress:

The process inventories exist so long as we have been considering inventory as

buffer between two or three subsystems. Work-in-progress acts as a buffer with in

manufacturing sub-systems. There can be group of machines, which can be termed as

a work centers. The raw materials will have to go through a combination of operations

before it take shape as a ³salvable product´.

The rate of production at each production center depend on the technology,

While the production executive tries his best to balance lines« there is certain break

downs which will effect down stream productions. To overcome this work-in-progress,

inventories is stored at work centers.

Finished goods:

Finished goods are those goods available for delivery to consumer. Finished

goods act as buffer between production and marketing department. The input is quit

predictable but output depends upon the behavior of the market. The purpose of this

inventory is to assure a constant supply in distribution channels.

Some of the factors that contribute to high finished goods inventory

Errors caused in forecasting

Eagerness to satisfy the customersEconomic bath production

Multiply stock points

Imports

Distribution system



74

Packing materials:

Packing materials does not add to the value of product. It protects what it sells

and what it protects. Hence this cost some out of ones profits. Some consider packing

material subsystem to give a face lift to the product.

Spare parts:

Spare parts are the important inventory. Their consumption patterns differ from

raw materials, consumables or finished goods conversely stocking policies are

different.

Many problems occur in some case of these spares, some are:

Determination of level inventory for placing replenishment order and quantity to

be ordered.

The extent of delay in supplies and the extent of variations in demand which

Inventory should be able to withstand

Some spares are thus classified into:

Capital spares

Insurance spares

Routable spares

Maintenance spares

Over hauling spares

Capital spares and insurance spares are those spares of machine which have

nearly equal life of the machine. Characteristics of these spares are:

These are held as contingency against any break down

Their consumption is very low

The procurement lead time is very high

Normally these spares are produced along with original

equipment



75

Maintenance spares are those which have definite requirement compared to

capital and insurance spares. These are required for the replacement of old parts

caused due to replacement of wear and tear. They are fast moving and are repetitive.

Ratable spares are costly so they are not usually scrapped but they are prepared

and stored for use. The demand for such a spare for any single machine is low but for

group of machines is high. Queuing theory is practiced to control ratable spares.

Over hauling spares include those items which are specially needed during

regular overhauls. These items are like valves; coupling etc.the strategy that adapted to

control these spares are based on past consumption. Therefore initial provisionin g

either when starting a new industry or machinery is problematic.

Cost of holding inventory:

One operating objective of inventory management is to minimize cost.

Excluding the cost of merchandise, the costs associated with inventory fall into two

basic categories:

o Ordering costs

o Carrying costs

Ordering costs are also known as acquisition or setup costs. Firms have to place

orders with the suppliers to replenish inventory of raw materials.

The expenses involved are referred to as ordering costs. A part from placing orders

outside, the various production departments have to acquire materials from the stores.

Any expenditure involved here is also a part of ordering cost. Included in the ordering

costs are costs involved in:

y Preparing a purchase order or requisition form

y

Receiving, inspecting to ensure both the quantity and quality.Carrying costs are the costs incurred for the maintaining a given level of

inventory. These are thus divided in to two categories:

Those that arise due to the storing of inventory



76

The main components of this category are

y Storage cost

y Insurance of inventory

y Deterioration in inventory (for obsolescence)

y Servicing costs

The opportunity cost of funds consists of expenses in raising funds to finance

acquisition. If funds were not locked up in inventory, they would have earned a return.

Benefits of holding inventory:

The basic function of inventory is to act as a buffer to decouple or uncouple the

various activities of a firm so that all do not have to be purchased at exactly the same

rate the key activities are:

Purchasing

Production

Selling

Since inventory enables uncoupling of the key activities of a firm, each of them can be

operated at the most efficient rate. This has several beneficial effects on the firms

operation. The term uncoupling means these interrelated activities can be carried out

independently.

Benefits in purchasing:

If the purchasing of raw materials and other goods is not tied to production

/sales, a firm can purchase larger qualities than is warranted by usage in production or

the sales levels. This will enable to avail discounts that are available on bulk purchases

moreover it will lower the ordering costs as fewer acquisitions would be made. There

will, thus be a significant serving in costs. Second, firms can purchase goods in

anticipation of announced price increases. This will lead to a decline in the cost of

production. Inventory will thus serve as a hedge against price increases as well s

shortage of raw materials. This is a highly desirable inventory strategy.



77

Benefits in production:

Finished goods inventory serves to uncouple production and sales. This enables

production at a rate different that of sales. That is production can be carried as a rate

higher or lower sales rate. This would be a special advantage to firms with a seasonal

sales pattern. In this case the sales rate. This would be a special advantage to firms

with a seasonal sales pattern. In case this sales rate will be higher than the production

rate during a part of the year and lower during the off season. The choice before the

firm is either to produce at a level to meet tactual demand i.e., higher production

during peak season, produce continuously throughout the year and build up inventory

which will be sold during the period of seasonal demand. The former involves

discontinuity in the production schedule while the latter ensures level production. The

level production is more economical as it allows the firm to reduce the cost of

discontinuation in the production process. This is possible because excess production

is kept in inventory to meet the further demands accompanying expenses. In brief and

since inventory permits least cost of production scheduling, production can be carried

more efficiently.

Benefits in sales

The maintenance of inventory also helps a firm to enhance its sales efforts. If

there are no inventories of finished goods the level of sales will depend upon the level

of current production. A firm will not be able to meet demand instantaneously. This

will be a lag depending upon the production processes. If the firm has inventory, actual

sales will not have to depend on lengthy manufacturing process. Thus, inventory

serves to bridge between the gap production and actual sales. A related aspect is that

the inventory services as a competitive marketing tool to meet customer demands. The

basic requirement in a firm¶s competitive position is its ability as well as its

competitors to supply goods rapidly, if not customers may shift to suppliers. Inve ntorythus ensures continued patronage of customers. Moreover in case of firm¶s having a

seasonal pattern to sales, there should be a sustainable finished goods inventory prior

to peak sales season.



78

Inventory control:

The aim of production activity is t imely manufacture of desired product of

specified quality in proper quantity at least possible cost. To achieve production goals,

the production must simultaneously attempt to maintain stable operations, provide

customers with adequate service and keep investment in stock and equipment at

reasonable levels. Beyond the problems of management, there are certain questions

that business must face:

Where shell we maintain? How much stock?

Who will be responsible for it?

Why do we have inventories?

What effects the inventory balances we maintain?

The basic problem of inventory policy is to strike a balance between operation

savings and costs and capital requirements associated with larger stocks. Business

management now has wide range of techniques for attacking control and inventory

control.

Control systems approach:

Control over inventory means good, long-range and intermediate planning of

production operations. A comprehensive and integrated control system, including

production planning, scheduling and control must be closely coordinate with other

planning such as cash planning, capital budgeting and sales forecasting. The essentials

of inventory control are:

Long range planning, to budget capital for facilities and inventory investment.

Intermediate policy making and planning as a basis for short-term schedule.

Short ± term scheduling of work assignment to keep facilities and employed

and stock balanced in view of demand for output as it actually materialize.

Factors influencing inventory:

There are various factors which both internal and external which have

influence on inventory. Inventory conditions start right from forecasting a requirement

such that required materials are made available only at right time. External conditions

including supplies lag time, environmental conditions, govt. rules and regulations,



79

credit availability, market conditions etc. all factors which have influence on inventory

could be summed up in to following categories:

o Lead time

o Relevant costs

o Ordering costs

o Inventory carrying costs

o Under stocking costs

o Over stocking costs

o Several levels

o Obsolete inventory

o Scrap

LEAD TIME:

Lead time is defined as a period that elapses between recognition of the need

and its fulfillment. In any industrial network one has to follow the following broad

pattern before ordering and making it available

o Fore cast the requirement

o Requisition the exact quantity

o Selection of sources of supply

o Negotiation of rates

o Annual ordering

o Follow up with supplies

o Receiving materials

o Inspection of materials

o Proper warehousing

o Preservation of material

o Proper issues and recording

o Payment of supplier¶s bills

The above steps show the total ordering cycle. But market is not available to

use till it is inspected and given to store. The whole cycle could be classified in four

lead time categories



80

o Internal lead time

o External lead time

o Transportation lead time

Internal lead time, which is also known as administrative lead time, which

starts from identifying the need for an item till all order is placed for that item.

Requirement for an item has first to be identified before it is ordered. It may

take a long time before an actual need is finalized. The first activity is a location

of a source which can be done by data bank, magazines etc.the next activity is

negotiating the terms and conditions of supply. Thirdly, placing an order with

tight source. Internal lead time ceases once the order reaches the supplier and he

confirms it.

External lead time, which is also known as a manufacturing lead time,

depends on the business and the time taken to manufacture and dispatch a

product.

Transportation lead time is the period for the time a manufacturer dispatches

the goods to time of actual receipt of goods at stores of purchaser. Inspection

lead time, is the one where materials that comes to stores, has to be checked to

find out whether they supplied as per the requirement of the organization and

per the stipulated orders.\

Relevant costs:

There are several factors, which are affected by the conditions of excessive or

insufficient inventories. It is for many reasons stocked inventory will be useless that

we incurred high costs in general the costs of inventories will be under this

classification as:

Ordering cost (U)

Inventory cost (I)

Under stocking cost (KU)

Over stocking (KO)

Ordering cost is the one which, each order that is placed on the supplier costs money,

since lot of executive time, stationary, salary and wages etc will go in with a purchase



81

order. It may be more in case of imported goods and may be less in those of cash

purchases. Ordering costs in the some result of the costs o fulfilling various activities

that go into finalizing an order. The cost of ordering (u) will include costs due to;

Stationary, typing, dispatching of orders.

Salaries and wages

Receiving and inspection costs

Cost of source development

The cost per purchase order can be calculated as,

Cost per purchases order = Total cost including on above heads / Total number of

orders

Inventory carrying costs are the costs which involve in the storage of materials this

cost can be calculated computing the following costs:

o Interest rate

o Obsolescence cost

o Over head costs

o Insurance costs

Under stocking costs (KU), are due to demand of an item and not being

provided for production. If a V is not made available to production there would be loss

of production, sales, good will. Computation of KU is very problematic.

Over stocking costs (OK), is the cost which insures high expenditure. It

involves loss of utilizing company¶s valuable fund. Over standing costs is therefore a

cost basically arising due to opportunity lost due to the investment in the inventory for

longer period.

Service level:

Service level is a relation between under stocking cost and over stocking costsof keeping an inventory and demand for that item arising leading to stock out.

KU

Service level= ____________

KU+OK



82

Obsolete inventory:

Inventory that is purchased and which is of no importance for the organization

is termed as obsolete inventory. These can be due to any one of the following reasons

Technology change

Changes in product line

Changes in machines

Changes in design and layouts

Overbuying

Scrap:

When utilizing the inputs it is not possible to utilize 100% area, so certain scrap

generation is inevitable. Manufacturing process itself generates scrap. One may

generate scrap in the form of packing items, gunny bags, papers, which has resale

value.

INVENTORY CONTROL TECHNIQUES:

ABC analysis

VED analysis

SED analysis

HML analysis

FSN analysis

EOQ analysis

MAX analysis (MAX-MIN)

Two - bin system

MRP analysis



83

ABC analysis (Always Better Control):

Where there are a large number of items in the inventory, it becomes essential

to have an efficient control over comparatively greater care should be given to the

higher values.

The movement of certain service concern may consist of a small number of

items a minor portion of inventory value. The modern technique for collecting the

inventory is a value item analysis popularly known as ABC analysis that attempts to

relate how the inventory value is concentrated among the individual items.

This analysis is based on the praetor¶s law, which states that a fewer item of

high usage having high investment value should be paid more than a bulk of items

having low usage value and having low invest mental in capital.

Category ±A, which includes the most important item which represents about

60 to 70% of values of stores but constitute only 10 to 15 % of items.

Category ±B, which includes less important items representing an invest mental

value of 20 to 25% and constitutes a similar % of items.

Category- C, which consists of the least important items of stores and

constitutes 60-70% of stores item representing only a capital investment between 10-

15%.

Steps in ABC analysis:

1. The money value of the items of the materials chosen should be calculated by

multiplying the quality of each item with the price.2. The item should be rearranged in the descending order of their values

irrespective of their qualities.

3. A running total of all values and items will than be taken and the figure so

obtained should be converted into % gross of total.



84

4. It will be found that a small number of first item may to large % of total value

of items. The management then will have to take a decision as to the % of the

total value , which have to be converted by A,B&C categories.

Advantages of ABC analysis:

I. It ensures closer on costly items in large amount of capital invested.

II. Helps in developing a scientific method of controlling inventories.

III. Inventory control at minimum cost.

Parameters for ABC classes of item in inventory:

Class Control Lot size Buffer stock

A very close small very small

B medium medium moderate

C loose large large

EOQ analysis (Economic order quantity):

A strategic factor in the inventory management is the consumption of the

optimum size of normal purchase order. Decision about how much to order has great

significance in inventory management. The quality to be purchased should neither be

small nor big because costs of buying and carrying material are very high.

Economic order quantity is the size of the lot to be purchased which are

economically viable medium costs.

HML analysis:

This analysis is based on cost of items. H,M&L alphabets represent item

highest cost, medium cost and lower cost.

FSN analysis:



85

Under this analysis the quality and rate of consumption are to be taken in to

consideration. Here µF¶ stands for fast moving items, µS¶ stands for slow & µN¶ for

non-moving items.

Two ± bin system:

Under this system all inventory items are grouped under two categories. In the

first group, a sufficient supply is kept to meet the current requirement over a

designated period of time. In the second group or bin, a safety is

maintained to meet the requirement of inventory at times when stock in the first bin is

exhausted and recording occurs.

MRP analysis:

Materials requirement planning is a computer based inventory and the

production schedule system that considers all that goes into completing an order for

large for shop situations were many products are manufactured in periodic lots via

several processing steps.

VED analysis:

The VED analysis is used generally for spare parts. The requirements and

urgency of is different from that of materials. Spare parts are classified as vital (V),

essential (E), and desirable (D).

SED analysis:

This analysis is based on the availability of materials and is useful where items

are scarcely available. µS¶ stands for scare items, µD¶ difficult items and µE¶ stands for

easily available in the market.

PURCHASING:

Purchasing is the first phase of material management. It means procurement of

goods and services from same external agencies. The objective of purchasing

department is to arrange the supply of materials, spare arts and services of semi



86

finished goods, required by the organization to produce the desired products from

agency are source out side the organization.

DEF: According to Alford and Beauty, ³purchasing is the procuring of the

materials, supplies, machines and tools and services required for equipment,

maintenance and operation of the manufacturing plant´.

OBJECTIVES:

Purchase of satisfactory material

To control the quantity of material

Proper negotiations with suppliers

Control proper use of material

Coordination with other departments

Maintenance of good will

Exploration to locate new suppliers

Stores control

Store keeping:

It is servicing facility, inside an organization responsible for proper storage of

the material and then issuing into respective departments on proper requisition. Those

which are not in use specific duration.

According to Maynard, ³the duties of store keeping are to receive materials, to

protect them while in storage from damage and unauthorized removal to issue

materials in the right quantities, at the right time to the right place and to provide these

services promptly and at least cost´.

Receiving:

The item order in purchase department is receive by the section. the supplier

delivers the items along with the order documents to receiving section of stores



87

department. The materials when received from the supplier are under the temporary

custody of receiving department. These materials are usually accompanied with one or

both of the documents:

I. Advice of dispatch, which is sent by the supplier intimating dispatch of

materials from his premises.

II. Delivery note of packing note which is received from the carriers who transport

and deliver the materials.

III. On receipt, the materials are checked with reference to the copy of purchase

order in possession of receiving department. The quantity received is verified

with quantity on order and the quantity specified on the purchase order is

checked din the inspection department.

Valuation of materials received:

The general rule is that the invoice price as billed by the supplier should be

accounted for in the ledger. Certain problems regarding the accounting of receipts are

specified as:

Cash discount, is a discount supplied by the supplier if payments of bills are

made with in the period specified.

Trade and quantity discount is the amount of those discounts is already deducted from

the invoice price no difficulty arises in their accounting.

Store section:

This is a place where all materials received by the stores department are kept with

protection against deterioration and pilferage. They are stored in such a way that is

stored in such a way that their location is easily identified at the time of issue.

The various stores operations are:

o Location in store section

o Layout of stores section

o Stores equipment

o Materials handling facilities

o Identification of stores



88

Storage control & methods of pricing issues:

The stores produce mainly consists of stores control and issue control

Stores control:

After the materials on order are received, checked and approved, the stores

keeper takes them on charge. He is responsibility for placing the materials in their

appropriate places inside the store and for ensuring the they are maintained in good

condition during storage till required for utilization in production. The control duri ng

this stage is called as storage control.

Issue control:

Materials when required for consumption are issued to the departments

concerned as per authorized quality under proper authority. The issues are priced and

the values they are charged to the costs of the products. Any surplus of identification

by the departments to the store is properly accounted.

Classification & codification of materials:

For purpose of identification and for convince in storage and issue, each item of

stores is given a distinct name. Similar items are classified under sub- groups and a

number of such sub groups are classified under main or major groups.

Classification of stores should be accompanied with a suitable system of

codification is the producer for assign symbols, for each item in accordance with a

proper arrangement.

Codification has following advantages:

Ease in identification of storesWriting full names and particulars of materials on document is dispensed with so that

clerical work is reduced

In mechanized accounting, codification is essential

Quoting symbols along with nomenclature ensures clarity

Ensure secrecy



89

Three methods of codification are

i. Numeric

ii. Alphabetic

iii. Alphabetic and numeric

Perpetual inventory system:

It is also known as automatic inventory. The control of materials while in

storage is affected through what is known as perpetual inventory. The two main

functions of perpetual inventory systems are:

Recording stores recipients and issued so as to determine at any time the stock

in hand, in the quantity or value or both with out the need for physical count of stock.

Continuous verification of physical stock with reference to the balance

according to recorded in the store records as any frequency, as convents for

management.

Perpetual inventory system comprises:

Bin cards (quantitative perpetual inventory)

Stores ledger (quantitative cum valued perpetual inventory)

Continuous stock-taking (physical perpetual inventory)

Bin cards, are quantitative record of recipients, issues and closing balances of

items of stores. Separate bin cards are maintained for each item and are placed in

shelves or bins or suitably hung up as convenient along side the materials in go downs.

Stores ledger, is maintained to record all recipient and issued transactions in

respect of materials with the difference that along with the quantities, the values are

entered in the receipt, issue and balance columns.Continuous physical stock verification, specific the physical check the

transactions, the physical stock verification can be done by some methods: \

Inventory tags

Record in bin cards

Stock verification



90

Materials requisition: The document which authorizes and records the issue of

material requisition. The contents in the material requisition are

Number and date of requisition

Section demanding

Particulars and code for the materials

Authority for requisition

Quantity demanded

Unit cost

Total cost

Signature of person placing requisition

Materials return note: situations arise when materials have to be returned from

production departments to the store. The following types of return may be necessary:

1) Materials issued in bulk in excess of requirement.

2) Scrap, waste arising out of defective and spoiled work.

3) Excess materials on account reduction of production order.

4) Surplus on account provision in the bill of materials.

Pricing of materials issues:

The various methods used for the purpose are:

y Specific price method

y FIFO method

y LIFO method

y Average price method

y Standard price method

y Base stock method

y HIFO method

y Market price method

y NIFO method

y Inflated price method



91

Specific price method, when stores are purchased specifically for

Utilization against a particular job or production. E.g. Repairs and capital

works.

First- in first ± out method, is one of the pricing of issues is done in the

Reverse order of purchase by adopting the price of latest available consignment.

Average price method, is one where pricing is done on the average cost basis.

This is suited for items of small values and also when the transactions are numerous

and there is a heavy fluctuation in the purchase price. Under this sharp pricing

fluctuations are smoothened.

Various methods in this category are:

Simple average method

Periodic simple average method

Moving simple average method

Weighted average method

Periodic weighted method

Moving weighted average method

Standard price method is one of when pricing of issues is predetermined for the

stated periodic taking into account all factors affecting the price.

Base stock method is used on the principle that only a portion of stores moves and a

core is always maintained in stock. This base stock represents the minimum balance of

the material and is computed on the estimated basis for each item.

Highest ±in first- out method, assume that closing stock should always remain at the

minimum value and so the issues should always be made at the higher value of the

recipient.



92

Market price method, the market price is adopted as the basis for pricing of issues of

obsolete stores and items which have been lying in the stock for long periods in which

each case the net realizable price should be adopted at the issue price.

Practical problems in inventory management:

The important of balancing the requirements of a production outfit with the

inventory management. Achievement of a definite production plans is difficult, which

means balance among all aspects of production such as total strength, operating

efficiency, and facility utilization. Capacity was created with out the reference to

balancing concept. So inventory imbalances are inevitable and capacity utilization is

one of the main problems of capital investment in our country. This problem has many

ramifications in the form of excess capacity, imbalance in capacity etc. if utilization

and operating efficiency has to be optimized, disposal of inventory in the form of

finished goods is absolutely necessary.

All ³SOS¶s´ indents need not mean stock-out. If all stock out indents are analyses;

Certain stock outs in raw material section were due to certain components

getting lodged in components inventory build ups due to pressures for keeping

machines working there by causing ³premature consumption ³ of raw material.

Manufacture for stock quite often means processing of large batches, especially in the

case of automatic machine batches, especially in the case of automatic machine

batches, especially in the case of automatic machine shop. Settings on autos cannot be

distributed to promoted small quantities.

Organization for inventory management, by which is the major one by which a

firm is facing major problems. Systems analysis for stream lining the moment of

purchase files and making the organization more compact and efficient has been dealt.

However, one of the main causes of the actual internal lead time being organizationaldeficiencies, what it should be being organizational deficiencies, it is considered as a

problem of special significance in the working of the company.



93



94

INTRODUCTION TO NFCL INVENTORY

Inventory includes raw material, work in process and finished goods in case of

manufacturing raw materials and work in process inventories are needed for smooth

production. Inventory management is essential for production oriented company¶s

minimize the costs and to utilize funds properly.

NATURE OF INVENTORIES:

The following are the inventories maintained by the NFCL for production of

UREA:

y Raw materials

y Work in process

y Finished goods

y Stores and spares, packing materials

Raw materials:

For production of urea the basic raw material used in NFCL are naphtha,

natural gas, other chemicals and materials. Raw materials are purchased and stored in

tanks for smooth production. It is a continuous process.

Naphtha is an important raw material in production of urea. Naphtha and

natural gas are used to produce ammonia and ammonia is converted in to urea. NFCL

is drawing the raw material through pipeline from various agencies fro the production

of urea.

Work in process:

During normal operation ammonia produced in the ammonia plant goes

directly per urea manufacture. In case of raw materials plant stoppage or running at

low load, in order to avoid stopped or reduction of ammonia plant load, two ammonia

storage tanks each of 5000MT capacity are provided where liquid ammonia can be

store.



95

Finished goods:

Finished goods in terms of NFCL mean urea. They are supplied to farmers, dealers in

villages, towns and cities. As per as the internal storage is concerned zero inventory

will be maintained. Mostly the products are seasonal so the production will be more in

karriff and rabbi season. In order to avoid the fluctuation in demand, NFCL is

maintaining bagged urea in 600 go downs. 4000 MT will be manufactured per day.

The go downs can be classified into:

Buffer go downs

Filed go downs

Go downs are belonged to government agencies and private agencies. The go downs

are taken on hire at cost as probable comparable with others. Demand is more in

season, so to meet seasonal demand it is produced urea at its full capacity through out

the year, approximately 4000 tones/day.

Here the holding cost of finished goods is very minimal(interest and storage

cost) on the year ending march 31st. it is unseasoned so that ever unsold stock is there

it should maintain for another four months up to khariff season.

Buffer go downs is huge area can be stored that is more than 1000 metric tones,

it is permanent go downs. Government can be under taken this type of go downs.

Filed go downs are a temporary in which less than 1000 urea can be stored. Urea can

be obtained from buffer go downs.

The rent paid during the year is 144.92 lakh it will be 12 lakh per month. When

goods are delivered to dealers, NFCL is following FREE ON LORRY SERVICE

(FOL)

Stores and spares:

The project work dealing with inventory of stores and spares in NFCL encompasses

the following aspects:As production is concerned no inventory is maintained except naphtha. So

these materials do not directly enter production but necessary for production process.

Even though certain huge amount of expenditure is incurred, the required

important spares are to be kept ready at stock for any emergency replacement.



96

The cost incurred on stock of spares will be very less when compared to the revenue

loss due sudden shut down of production urea.

There are certain spares to be replaced frequently due to wear and tear. Those

are electrical spares, mechanical spares, and instrumental spares.

PROCESS DESCRIPTION OF UREA PLANT:

The method of valuation of WIP is at cost i.e. materials cost, labors,

Factory administrative over heads and depreciation but excludes interest on

borrowings.

UREA PLANT:

The production of urea requires ammonia and Co2 as the inputs, both of which

are available from ammonia plant. The pilling tower of 22 m diameter and 75 M free

fall high

Operates under natural draft. The urea perils from the bottom of pilling tower are

transported through mechanized belt conveyor system in to urea storage silo or

directly to urea bagging plant.

BAGGING:

The periled urea from the urea plant is transferred to the bagging plant in belt

conveyers. The pilled urea enters the bunkers designed for 50 Mt of urea capacity.

Bunkers are provided with load cells, which have 2 independent electronic bagging

machines

Materials management:

Materials management is an important function of an organization covering

various aspects of input process which are necessary for the production process and

spare parts fro the maintenance of plant. Thus in a production process materials

management can be preliminary to transformation process.

Objectives:

Materials management contributes to survival and profits of an enterprise by

providing adequate supply of materials at the lowest possible costs.



97

THE FUNDAMENTAL OBJECTIVES ARE:

Material selection

Low operating costs

Receiving and controlling materials

Issue material

Purchase department:

Purchasing is the one phase of materials management. This department is

processing different goods and services from some internal agencies. The main

objective of this department is to arrange the supply of materials, spare parts and

services or semi-finished goods of desired quality, quantity at lowest price and at the

desired time. What ever required by the NFCL to produce the urea will procured from

some source out side the NFCL.

Purchase policies:

A policy is a statement which describes in a very general terms as intended

course of action.

Purpose of policy statement:

y To formulate operating procedures

y To guide in making decision about unusual problems



98

Purchase procedure:

Indent

|

Selection of venders

|

Selection enquires to vendors

|

Receiving quotation from supplies

|

Preparing quotation comparison

|

Statement calling negotiation/minutes of meeting

|

Note for approval

|

Purchase order

ISSUE SECTION:

In NFCL issues and stores will be maintained by the issue section. No

documents were regarding the issue is concern. It is maintaining weighted average

method for issues.

Moving weighted average method:

The issue rate is calculated by dividing the sum of periodic weighted average

prices for a number by a total number of such periods. The procedure is seen in thetable.

For standing materials items can be classified and assigned bin number. The

two types of items.



99

ITEM GROUP BIN NUMBER

Consumables Spares

Electrical spares

Mechanical spares

Instrumental spares

01-40

41-50

51-75

76-90

Inventory control:

NFCL has separate section called ICC (inventory control cell) through SAP

system. The ICC will control the whole stock proceedings and the main objective is to

minimize the order on the basis of consumption pattern and its lead time. By SAP

every thing will be is closed in the computer. The minimum lead time of consumables

is one month on the basis of safety stock.

Total 41220 items are stored out of these 558 items are maintained by ICC,

whose cost is around 30 lakh.

Objectives of ICC:

Consumption pattern

Average consumption

Lead time



100

Qualities of ICC:

Representative nature

Quality also considered

Multi ± user departments

Responsibility to control all issues

Regarding items in store.

Control techniques

NFCL is following mainly the following techniques

FSN ANALYSIS

ABC ANALYSIS

VED ANALYSIS

JIT

FSN Analysis:

FSN analysis discloses fast moving, slow moving and non moving items.

This is the better technique for ascertaining the high value of slowing and non moving

materials has blocked huge sum of money unnecessarily for raw materials. So to over

come this problem or to make arrangement for their exchange with inventories

required by concerned. There is no new requisition, for this process inventory turn

over ratio identifying slow moving items.



101

FSN analysis for the purpose of identifying fast moving ,slow moving, and

non moving items in NFCL:

S.no. Description Group Definition

1 Fast moving items 01-40 Items having consumption above

10% of stock in last 2 years

41 above Items having consumption more

than 10% of stock during

previous 3 yrs

2 Slow moving items 01-40 Items having consumption above

10% of stock in last 2 years



previous 3 yrs

3 Non-moving items 01-40 Items having consumption above

10% of stock in last2

years



previous 3 yrs

INTERPRETATION:

Based on the table there are 9620 items with 6.435 crores as fast moving items

which is less than the previous year, i.e., 8029 items with 7.323 crores.

The slow moving items are 541 with 0.223 crores which are less than previous year

i.e. 799 items with .834 crores worth.

The non-moving items are 29372 with worth 5.999 crores which is less than previous

year figures 29057 items with 31.43 crores worth.



102

FSN ANALYSIS :

Summary as on 07-01-2011

Fast Moving Slow Moving Non Moving Total Items

S.NO Description No.of

Items

Value

on

Crores

No

of

Items

Value

on

Crores

No.of

Items

Value

on

Crores

No.of

Items

Value

on

Crores

1 General

Consumables

4089 2.370 386 0.194 6036 1.834 10506 4.398

2 Catalysts 9 0.341 0 0.000 14 0.625 18 0.966

3 Bulk Chemicals 24 0.217 0 0.000 6 0.016 25 0.233

4 Packing Material 9 0.742 0 0.000 6 0.005 10 0.747

5 Electrical Spares 45.9 0.040 10 0.001 2270 0.253 2689 0.294

6 Mechanical

Spares

3566 2.093 114 0.023 15387 2.328 1906.2 4.444

7 Instrumentation

Spares

1538 0.632 31 0.005 5653 0.938 7223 1.575

Total 9655 6.435 541 0.223 29372 5.999 39533 12.657



103

ABC Analysis:

ABC analysis is a technique of exercising selective control over inventory

items. The technique is based on this assumption that a company should not exercise

the degree of control on items which are less costly.

The smallest number of high consumption value items is called A items

The medium consumption value items are B items.

The largest number of least consumption items is C items.

CLASSIFICATION :

SUMMARY AS ON 29-12-2010

Category No of items Value in crores

A 446 14.05

B 888 04.01

C 7582 02.00

Total 8916 20.06

NFCL has considered the parameters as used are the following:

A class up to 70%

B class up to 70%-90%

C class up to 90%-100%



104

VED analysis:

The VED analysis is used generally for spare parts. The requirements and

urgency of is different from that of materials. Spare parts are classified as vital (V),

essential (E), and desirable (D).

SUMMARY AS ON 07-01-2011

CATEGORY NO OF ITEMS

VITAL 4735

ESSENTIAL 11884

DESIRABLE 13399

JIT (Just In Time Inventory):

This was originally developed by Taiichi know of Japan. Simply implies that

the firm should maintain a minimal level of inventory and rely on supplies to provide

parts and components ³Just-in-Time´ to meet its assembly requirements.

In the Just-in-time Inventory system, while conceptually very appealing

difficult to implement because it involves a significant change in the in the total

production and management system.

The JIT is the technique specially adopted by NFCL for the fulfillment of

requisition of spare parts through baring bank system. By this system there is no need

to invest money on inventor. The fulfillment will be with in Days of a need. The data

from purchasing, consumption, saving, recording are required. In our NFCL, there is a

contract with SKF authorized dealer, who maintains some stock and fulfils the

requirement when ever occurs by the NFCL.

In the JIT bearing bank 1 ½ core cost items were there, when it was started. JIT

completed three years in NFCL and now it is having86

lakh cost items under which150 items are identified. The oils required in NFCL are fulfilled by rate contract for

the consumption process with in 1 or 2 days. The tube lights, electric lamps are also

maintained by JIT through contract basis.

Inventory turn over ratio:



105

The inventory turn over ratios are broadly classified as:

Inventory turn over ratio

Raw material turns over ratio

Work ± in process turn over ratio

Finished goods turn over ratio

FORMULA:

Inventory turn over ratio = cost of goods sold / average stock

Where, cost of goods sold = opening stock + purchases + manufacturing

Expenses-closing stock

Average stock = (opening stock+ closing stock) / 2

The ratio shows how much inventory should be maintained at a level which balances

production facilities and sales needs.

Year Cost of goods Average stock Ratio

02-03 660.78 36.37 18.16

03-04 659.14 43.62 15.13

04-05 939.66 46.62 20.13

05-06 1169.49 53.97 21.67

06-07 1044.72 39.47 26.46

07-08 911.16 68.52 13.29

08-09 2163.3 98.45 21.97

09-10 1749.22 39.30 44.50

Work ± in process conversion period of ammonia:

Work in the process conversion period: average work- in ± process / * days

Total cost of production

Year 02-03, average WIP = (opening balance + closing balance) / 2

(8194.48+ 8638.53) / 2 = 8416.50 units



106

Total cost of production Rs in lakh

Raw materials consumed

Power and fuel

Catalyst charge

Chemicals and consumables

Salaries, wages and benefits

Packing material consumed

Transport and handling

Deprecation

Interest and financing charges

40672.46

31191.26

571.87

732.56

7734.24

4540.10

12877.80

12817.57

14904.12

Total cost of production 1,26,042

WIP conversion period = 3423.50/90873.21 * 365

= 0.004 days



107

Stock of ammonia as per the year 09-10

Month Average raw

materials

Total

consumption

WIP conversion

period

April

May

June

July

Aug

Sept

Oct

Nov

Dec

Jan

Feb

Mar

April

May

jun

july

AugSept

Nov

dec

2511.71

2604.55

4632.93

2293.84

2677.08

1005.89

3.4695

553.85

1332.46

1481.07

701.076

3136.24

2428.94

1825.85

1209.25

1000

900

1009

1081

4332

90873.21

90873.21

90873.21

90873.21

90873.21

90873.21

90873.21

90873.21

90873.21

90873.21

90873.21

90873.21

90873.21

90873.21

90873.21

90873.21

90873.21

90873.21

90873.21

90873.21

0.829

0.888

1.529

0.7825

0.883

0.332

0.001

0.182

0.454

0.488

0.21

0.35

0.027

0.020

0.0133

0.011

0.0099

0.0111

0.0119

0.048



108

DETAILS OF INVENTORY ( Excluding Packaging material 2006 ± 10 )

YEAR VALUE IN CRORES

2005 - 06 21.17

2006 - 07 15.12

2007 - 08 17.18

2008 - 09 19.08

2009 - 10 20.92



109

Inventory holding period:

Inventory holding period = 360 / inventory turn over ratio

This ratio shows for how many days the inventory of unit is being

stored. Inventory holding period in NFCL for past 5 years as follows

Year Inventory 360 Inventory

Holding period

03-04

04-05

05-06 06-07

07-08

08-09

09-10

18.16

15.14

20.13 21.67

26.46

37.47

29.69

360

360

360360

360

360

360

19.82 days

23.79 days

17.88 days16.66 days

13.60 days

9.60 days

12.12 days



110

Interpretation:

In general a higher period indicates favorable performance of the

inventory holding period indicates a favorable performance of inventory holding

period is preferable in any company in order to avail the benefit of adequate inventory

holding and which in turn reflects the W.C performance of company. The holding

period of NFCL in the year 97-98 is higher and shows decreasing trend in the

following years.

Stores and spares as on 15-01-2011:

S.no Description Items Inventory

value of

15-01-11

Inventory

value of

02-12-10

Net

Effect on

Inventory

1 General

consumables

10670 4.817 6.240 - 1.423

2 Catalysts and

chemicals

15 0.992 0.992 0

3 Bulk

Chemicals

31 0.638 0.780 - 0.142

4 Electrical

spares

2779 0.430 0.426 -0.004

5 Mechanical

spares

21093 9.718 9.541 0.177

6 Instrumentation

spares

7061 2.726 2.943 - 0.217

TOTAL 41,649 (19.321) 20.992

- 1.601



111

Findings: decrease in inventory = 28.971 crores

Interpretation:

(decrease) in consumption of materials = Rs 0.337 crores

Due to capitalization of insurance spares = Rs 28.634 crores

_____________

Rs. 28.971

______________

Inventory accounting:

The inventory accounting deals with the valuation of inventory starting

from the process starting and reaches the ending or till the departure of the product.

This inventory accounting plays a vital role in an organization.

Inventory account:

Check whether purchase indents have been raised on the basis of

authorized requests and prescribed norms of inventory control

Verify whether purchase orders have been placed on approved suppliers

after properly processing quotations, tenders etc.

Check whether description, specification, sanction reference, material

classification codes, are properly mentioned in purchase order.

Ensure that there is a record for purchase order.

Check the inspector¶s certificate, storekeeper acknowledgement for

proper inventory transaction.

Check the accounting disposal to ensure proper accounting as to

classification and differentiation between revenue and capital.

Checking of issue documents, cost documents, sales documents, and

delivery notes has to be done.Use of computers in inventory accounting:

In manufacturing concern all materials purchased are meant for

consumption. So proper material accounting must be done. The computers in material

accounting have following applications:



112

Tabulating the value of purchase according to each product

classification, manufactured, storage location.

Computing the value of material consumed for each product.

Preparing ABC analysis of stock of materials consumed for each

product.

Preparing FSN analysis of stock.

Material planning and procurement of high value items.

Vendor performance and vendor analysis.

Index of suppliers of high value items.

INVENTORY ACCOUNTING THROUGH SAP

INTRODUCTION:

System application product (SAP) is an integrated package adopted by NFCL

for all functions such as finance, materials, process, selling and distribution to have

better accounting of their transactions. It is designed to have a better inventory

control.

INVENTORY ACCOUNTING:

Inventory accounting means recording of transaction relating to inventory

starting from the raw materials to the finished goods. Inventory accounting is useful to

have better grouping of materials, their valuation, for having up to date knowledge

about the inventory and to have a good accounting ledger free from misappropriations.

The package is made that each and every department like auditing, purchasing,

stores and finance e.t.c are interlinked together by taking37

entities. These37

entitiesare interlinked by taking 3 common fields.

They are

Material code

Movement code

Valuation clause.



113

As there are thousands of items, the total materials are divided into 99 groups.

Each group consists of different items and they are identified by a definite code of 8

digits. The first two digits of code signify the group to which it belo ngs. For each and

every item in the group a master file is defined and it consists.

Item code.

Description.

Movement type.

Valuation clause e.t.c.

The groups are classified in to 5 categories:

y Chemicals

y Consumables.

y Catalysts.

y Indigenous stores & spares.

y Important spares.

Sap is the system which allows goods movement like goods recipient, goods issue,

stock transfer and transfer posting.

The document principle:

A document principle must be generated and stored in the system for each and

every transaction or an event which causes a change in the stock.

When ever a goods movement is posted material document and accounting

document are created in the SAP.

A material document is one which is generated when goods are posted and an

accounting document is one which deals with the financial aspects i.e., if the

movement is relevant to financial accounting (if leads to an updated of general ledger

accounts). The general ledger accounts involved in the goods movement are updated

through an automatic account assigned.

In NFCL the material module is linked with the financial module through SAP.

As a result there is no need for reconciliation of the stores ledger and the finance

ledger at the end of each and every month as other organizations do.



114

When ever consumption of any stores items in there account code is

automatically picked up by the system. When material is issued, not only ledger

control but cost control is also there at there at the possible cost center.

A material document is identified by document number and material document

year and accounting document is identified by the company code, the document

number and fiscal year.

For each transaction event type and document type and a number range will be

assigned in the material document as well as in accounting document.

In master, the classification of materials, purchasing of the materials, foreign

trade imports, purchase order, mpr1, mpr 2, mpr 3« Storage, accounting, costing etc.

will be there.

In mpr1, mpr 2, mpr 3, the ABC indicator will be there to indicate the material

to which group it belongs to. In the storage material the field material storage will be

there which is divided in to 3 units i.e., kkd 1, kkd 2, kkd3 in NFCL

In the accounting file the valuation clause will be there which is divided in to

indigenous stores or spares credit or consumer debit. This valuation is divided into

indigenous stores or spares, imported stores / spares, consumerables,welfare items,

uniforms and soon. So in the stores ledger the first 40 are called as consumables and

from 40 to 90 are called as imported and indigenous stores or spares.

Or icing cost storage location is also there in accounting file.

The cost center module is one which tells about the transaction as materials i.e.,

from issues, from purchases etc, i.e., financial transactions.

The cost center accounting is a one which tells about the cost of elements,

actual costs, planned costs and variance (%).

A transaction that occurs in the stores is listed under the stores ledger and a

value generating transactions are listed under the financial ledger relating to materials.General ledger is the integrating form of stores and financial ledger and it is

activated based on the valuation clause, movement type and cost center.

The store document consists of item, quantity, material description, material

code etc and finance document consists of debit and credit entries.

Purchase recipient of material: stores debit, party credit



115

Issue of material for consumption: expenditure debit, stores credit

At NFCL purchasing departments are divided into 9 groups. Each group deals

with some items or a range of items, which holds accountability and responsibility for

the same.

Trend in Inventory Ratio

Year Inventory Amount Trend Percentage

2005-06 5776 100

2006-07 8488 147

2007-08 18923 328

2008-09 7494 130

2009-10 5938 103

The trend in the ratio is indicating a continuous raise and fall in all the

years under observation. During the year 2008 there is a drastic increase in the

inventory levels. Considering a period of 5 years such inflation is quite normal

and hence it cannot be interpreted as inventory is out of control.

TREND IN INVENTORY RATIO

YEARS



116

INVENTORY COMPOSITION

ITEM METRIC TONS PERCENTAGE

Single super phosphate 38100 43.23

Sulphuric acid 21788 24.68

Acetic acid 1485 1.68

Carbon ±di- oxide 360 0.41

Bio ± fertilizer 2700 3

NPK Granutes 24000 27

TOTAL 88433 100

INVENTORY COMPOSITION

0

5

10

15

20

25

30

35

40

45

50

SSP AS AA CO B ERT NPK

LIST OF ITEMS

% %

Major inventory items as inferred from the above analysis are single super phosphate,

sulphuric acid and NPK granutes. In Quantity terms other inventory items are very

insignificant. Hence management should have greater attention towards the specified three

items.



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Inventory Turnover Ratio

Year Sales Inventory Ratio

2005-06 145200 5776 25

2006-07 181500 8488 21

2007-08 219300 18923 12

2008-09 237100 7494 31

2009-10 198800 5937 33

Performance of the company in terms of the turnover ratio is at its best. During

the year 2010 it is about 33 times. There is a decreasing tendency by the year 2008. A

better inventory turnover ratio is very help full in control of inventory in any

organization and in particular to fertilizer industry.

YEARS

INVENTORY TURNOVER RATIO



118

INVENTORY TO CURRENT ASSETS

Year INVENTORY CURRENT

ASSETS

RATIO

2005-06 5776 67514 0.09

2006-07 8488 65373 0.13

2007-08 18923 93452 0.21

2

008

-09

7494 65796 0.12

2009-10 5937 53466 0.11

The ratio is supposed to identify the fraction of funds invested in inventory. Any %

below 30% is a health sign for managing the short term liquidity because about 70%

of the funds will be in the liquid assets. There fore the firm ability to meet its short

term obligation is not a problem.

YEARS

INVENTORY TO CURRENT ASSETS



119

INVENTORY TO WORKING CAPITAL

Year INVENTORY WORKING

CAPITAL

RATIO

2005-06 5776 47362 0.12

2006-07 8488 42732 0.20

2007-08 18923 51441 0.37

2008-09 7494 34762 0.21

2009-10 5937 15445 0.38

Analysis of this ratio is not at all sound and it quite different compared to that of

previous ratio. The absolute values in respect of working capital are not up to the

standards. The firm¶s short term liquidity is not properly managed. However inventory

is not a reason for such problem.

YEARS

INVENTORY TO WORKING CAPITAL



120

INVENTORY TO FIXED ASSETS

Year INVENTORY FIXED ASSETS RATIO

2005-06 5776 239958 0.02

2006-07 8488 222208 0.04

2007-08 18923 208709 0.09

2008-09 7494 204882 0.04

2009-10 5937 186431 0.03

The ratio is indicating an interesting fact that firm has very higher fixed assets

then current assets. Because the ratios of inventory to fixed assets are lower than

inventory to current assets. Generally manufacturing firms should have such higher

fixed assets than current assets otherwise their return on investment will be adversely

affected. So company should continue this practice.

INVENTORY TO FIXED ASSETS

YEARS



121



122

FINDINGS, SUGGESTIONS AND CONCLUSION

FINDINGS:

1. The company is maintaining the inventory levels in SAP.

2. inventory level includes ABC, VED, FSN, RE-ORDER LEVEL,

WEIGHTED AVERAGE METHOD, etc

3. During the all years, the current ratio of the company is above the standard

norms of 2:1 the highest current ratio is raised in 3.69 in 1999-2000 to 9.21

in 2006-2008.

4. The inventory turn over, average age of raw material, average age of finished

goods inventory, index spare parts inventory, work ± in ± process etc., are in

decreasing and increasing order. These inventory levels should be in the

standard position for achieving the objectives, goals

5. The NFCL has so far under the marketing seed programming successfully

distributed more than 1.5 million tons of urea.

6. Fertilizer product comes under Essential Commodities Act .hence the

government of India fixes the market price.

7. NFCL obtained cheaper financial resources than previous years.

8. NFCL contains 1000 acres of ³green belt´.



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SUGGESTIONS

1. The process of receiving materials from vendors includes many steps which

is length the process this cause ever delays in receipts and payment

processing. This should be reduced which improve effective utilization of

the time which will leads to better time management.

2. The Inventory in this company is huge and very careful evaluation has to

be done in monitoring the inventory built up at store. As inventory account

from a major share in the total inventory from a major shares in total

inventory from a major shares in the total cost of project.

3. The dead stock items and items which are not consumed over a period of

time are held as unmoved stock in stores. These stocks may be disposed by

the prior permission of management.

The procedure followed by the stores department in disposing the dead

stock items is as follows:

1) Submission of statement regarding dead stock held in the stores to

management.

2) Ask for the recommendation of the concern department.

3) If management permits dispose it off otherwise keeps it is dead stock.



124

CONCLUSION:

Out of the two basic raw materials only naphtha is stored in a storage tank of

NFCL. Natural gas is not stored. They are maintaining on average five days stock.

The holding costs for Naphtha is minimum in satisfactory.

Urea is transferred in to bagging plants where it is bagged and then sold or

stored in good owns outside Kakinada. In case it is stored in the silo, it is often a very

less quantity. Hence, product deterioration at plant is negligible.

Spare parts comprises of nearly 20% of total inventory value of NFCL. There

are certain insurance or critical spares. Critical spares. Critically which are required

for uninterrupted production even though the lead time is very less. Insurance spares

are those which are having more in value and takes 3-4 months to reach the site after

orders are placed from them. In order to avoid plant shut down these spares are stored

in need basis. There fore they are always kept in stores even though they are non-

moving. Their usage should be studied and disposed of to avoid unnecessary

investment in them for a long time.

The purchases department looks after an indigenous purchases and imports.

The vendors are selected after considering the quality of material, least cost, the

requirement and the urgency of the material. Therefore we find vendor selection

producer is in proper and correct.

The receiving section in the stores is responsible for accepting the material as

per the purchase order specification without any deviation. If any discrepancies are

found they will be sent back depending on the purchase order specifications.

The coding system of material facilities that easy identifications

monitoring, storing and issuing correct material in minimum time.

The Inventory control cell is responsible to ensure that the orders for the

materials are placed and also are issued on the basis of rate of consumption and the

lead time. We find that the recorder levels for some of items may be received based on

their usage.



125

The SAP provides easy transactions of either the financial ledger or the

stores ledger jointly. It makes the inventory according in an easy way.

The just in the Time Inventory which is applied for spares (bearing bank

system) makes the NFCL to fulfill its needs when it is needed within 48hrs.



126

BIBLIOGRAPHY

FINANCIAL MANAGEMENT : I.M.PANDEY

FINANCIAL MANAGEMENT : VAN HORN

FINANCIAL MANAGEMENT : KHAN & JAIN

PRINCIPLES AND PRACTICE

OF COST ACCOUNTING : N.K.PRASAD

PRODUCTION MANAGEMENT : E.F.BUFFA

ANNUAL REPORTS

MANUALS OF N.F.C.L

Documents

Inventary Mgnt