An empirical analysis of inventory efficiency of major refineries in India

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This paper evaluates the inventory management policies of four major petro chemical industries in India. The companies were selected on the basis of turnover. The financial statements of the companies for 5 years from 2012-2016 were considered for the study.

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International Journal of Management (IJM) Volume 7, Issue 7, November–December 2016, pp.426–432, Article ID: IJM_07_07_047 Available online at http://www.iaeme.com/ijm/issues.asp?JType=IJM&VType=7&IType=7 Journal Impact Factor (2016): 8.1920 (Calculated by GISI) www.jifactor.com ISSN Print: 0976-6502 and ISSN Online: 0976-6510 © IAEME Publication AN EMPIRICAL ANALYSIS OF INVENTORY EFFICIENCY OF MAJOR REFINERIES IN INDIA Dr. Varsha Nerlekar Associate Professor, MIT School of Business Pune, India Swapnil Patel Student (Finance), MIT School of Business; Pune, India ABSTRACT This paper evaluates the inventory management policies of four major petro chemical industries in India. The companies were selected on the basis of turnover. The financial statements of the companies for 5 years from 2012-2016 were considered for the study. The objective of the paper is to understand if there is any uniformity in the inventory management policies adopted by these companies. Inventory turnover ratio for these companies are computed and compared using Anova single factor Test and Tukey test to reflect the significant difference in the calculated ratios. Key words: Stress management, inventory management, Tukey test Cite this Article: Dr. Varsha Nerlekar and Swapnil Patel, An Empirical Analysis of Inventory Efficiency of Major Refineries in India. International Journal of Management, 7(7), 2016, pp. 426– 432. http://www.iaeme.com/IJM/issues.asp?JType=IJM&VType=7&IType=7 1. INTRODUCTION The oil and gas sector is among the six essential industries in India and has a major influence on various other sectors of the economy. According to the research published by the India Brand Equity foundation, India is expected to be one of the largest contributors to non-OECD petroleum consumption growth globally. Domestic refiners’ import of crude oil increased 9.1 per cent year-on-year to around 18.81 million metric tons during August 2016. Total fuel consumption is expected to grow around 5-6 per cent in FY 2016-17 and thereafter. Inventories on oil form an important element of the supply system of oil. Oil inventories ensure the balance between supply and demand. The oil analysts across the world observe the trends in the oil inventories while evaluating the market as well as for determining the price levels of oil. Primary stocks are held by the various companies supplying the markets: ranging from producers, refiners to importers. They are held in refinery tanks, bulk terminals, pipeline tankage, barges and coastal tankers (if they stay in the same country), tankers in port (if they are to be discharged at port) and in inland ship bunkers. Additionally, stocks held for strategic purposes by governments (e.g. US Strategic Petroleum Reserve) or by stockholding organizations (e.g. EBV in Germany) are included in the primary stock category. Secondary stocks are stocks in small bulk plants (marketing facilities below a certain capacity, e.g. 50 000 barrels in the United States, which receive their products by rail or truck) and retail http://www.iaeme.com/IJM/index.asp 426 editor@iaeme.com
An Empirical Analysis of Inventory Efficiency of Major Refineries in India establishments. Tertiary stocks are stocks held by end-consumers; these can be power plants, industrial entities or consumers in the residential/commercial sector This is why it is important to have information on the situation of oil stocks in the world. Information on product stocks can be as important as crude oil stocks. For example, crude oil stocks give an indication of the availability of crude to refineries in each country, and therefore are evidence on how well the refineries might provide the domestic market. On the other hand, information on low gasoline stocks before the driving season, or low heating oil stocks before the winter can be a warning signal to refineries, oil companies and governments that not only prices could raise, but shortages might possibly occur. Data on oil stocks are of particular importance for strategic decisions made by governments or larger oil companies. Aggregate and timely stock information is needed in order to look at longer-term planning so as to ensure adequate supplies to meet demand. Governments require extensive stock information so that they can react appropriately when oil supply disruptions occur (both nationally and internationally). Hence oil stocks are a critical element of information in an oil balance 2. NATURE OF INVENTORY IN PETROLEUM INDUSTRY Petroleum is a complex mixture of liquid hydrocarbons, chemical compounds containing hydrogen and carbon, occurring naturally in underground reservoirs in sedimentary rock. Coming from the Latin petra, meaning rock, and oleum, meaning oil, the word “petroleum” is often interchanged with the word “oil”. Broadly defined, it includes both primary (unrefined) and secondary (refined) products. Crude oil is the most important oil from which petroleum products are manufactured but several other feedstock oils are also used to make oil products. There is a wide range of petroleum products manufactured from crude oil. Many are for specific purposes, for example motor gasoline or lubricants; others are for general heat- raising needs, such as gas oil or fuel oil. The names of the petroleum products are those generally used in Western Europe and North America. They are commonly used in international trade but are not always identical to those employed in local markets. In addition to these oils, there are others which are “unfinished” oils and will be processed further in refineries or elsewhere. Oil supply and use in industrialized economies are complex and involve both energy use and non-energy use. As a result, the indications of use given below can only be guides to general practice and not rigid rules. Annex 1 provides full explanations of the processes and activities mentioned within the questionnaire. Oil is the largest traded commodity worldwide, either through crude oil or through refined products. As a consequence, it is essential to collect data as complete, accurate and timely as possible on all oil flows and products. Although oil supply continues to grow in absolute terms, its share in global total energy supply has been decreasing, from over 45% in 1973 to around 35% in recent years. Specific information related to the joint questionnaire The Oil Questionnaire covers oils processed in refineries and the petroleum products made from them. All sources of supply and the uses of the oils are to be included as well as their calorific values. Crude oil is not the only feedstock to a refinery. Other primary or secondary oils can be used as feedstock: NGL, refinery feedstock’s, additives and oxygenates and other hydrocarbons such as shale oil or synthetic crude oil from tar sands (see Table 4.1). A whole range of petroleum products are derived from crude oil, varying from light products such as liquefied petroleum gas (LPG) and motor gasoline to heavier ones such as fuel oil. Petroleum products are consumed in many areas. They are easily recognized in the gasoline used to fuel cars and the heating oil used to warm homes. Less obvious are the uses of petroleum-based components of plastics, medicines, food items, and a host of other products. Oil consumption occurs in the following main sectors: • In the transformation sector. • By the energy industries in the energy sector. • In the transportation and distribution of oil (although limited) http://www.iaeme.com/IJM/index.asp 427 editor@iaeme.com
Dr. Varsha Nerlekar and Swapnil Patel 3. PETROLEUM INDUSTRY IN INDIA The oil and gas sector is among the six core industries in India and plays a major role in influencing decision making for all the other important sections of the economy. In 1997–98, the New Exploration Licensing Policy (NELP) was envisaged to fill the ever-increasing gap between India’s gas demand and supply. India’s economic growth is closely related to energy demand; therefore the need for oil and gas is projected to grow more, thereby making the sector quite conducive for investment. The Government of India has adopted several policies to fulfill the increasing demand. The government has allowed 100 per cent Foreign Direct Investment (FDI) in many segments of the sector, including natural gas, petroleum products, and refineries, among others. Today, it attracts both domestic and foreign investment, as attested by the presence of Reliance Industries Ltd (RIL) and Cairn India. The major players are IOCL, BPCL, HPCL and MRPL Inventories include not just what’s held in storage tanks, but also the crude oil or products that fill pipelines or are being transported on ships, barges, trucks, or rail cars. While some may call these “reserves,” the term “reserves” actually only applies to specifically-defined and yet-to-be-produced, technically recoverable resources still in the ground – upstream of the distribution chain. On the downstream end of the distribution chain, there are also inventories, for example, at retail gasoline stations, in the fuel tanks of cars, trucks, jets, ships, trains, construction and farm equipment, and oil-heated homes. Although these have traditionally not been included in the statistical data on inventories, they are far from insignificant. For example, the fuel tanks of the 250 million registered U.S. cars and trucks would likely add another 10 to 20 percent to the roughly 300 million barrels of commercial inventories of gasoline and diesel fuel. However, collecting data on millions of vehicles would be more costly than collecting data on a smaller number of regularly-monitored refineries and terminals. One of the most obvious roles for inventories is in balancing receipts and deliveries for producers, refiners, wholesalers, retailers, and consumers. A producer may not be able to ship its crude oil immediately because of pipeline congestion or weather-related issues. A refinery finds it impractical to sit idle waiting for the next shipment of crude oil to arrive before it can restart its distillation unit. Products made at the refinery may have to wait for their turn in the product pipeline or for ships to arrive at the loading terminal, and so on. In addition, crude oil and products tied up in transit add to the inventories needed to keep the infrastructure operating. Thus, for growing market demand or an increasingly geographically diverse supply or consumption pattern, additional inventory is needed just to keep the various distribution channels filled. Obviously, a great deal of this crude oil or crude oil product is required to keep the system operating, and cannot be drawn down without hampering the distribution system. Two additional purposes of inventories are to meet seasonal swings in supply or demand and to deal with refinery downtime for maintenance and restarts. Refiners can smooth out their production schedules for the seasonal swings in demand for gasoline or heating oil by supplying product partly from inventories built up earlier. Seasonal variations in fuel specifications can make this more challenging. Juggling winter and summer-grade gasoline inventories to meet the mandated schedule for spring switchover – and keeping customers supplied with more than a dozen regional variants –can be an exercise in skillful inventory management and timing. Meeting seasonal swings for heating fuels (in the Northeast, in particular) also requires strategic planning for logistics, inventories, and distribution. http://www.iaeme.com/IJM/index.asp 428 editor@iaeme.com
An Empirical Analysis of Inventory Efficiency of Major Refineries in India 4. OBJECTIVES AND SIGNIFICANCE OF EFFICIENT INVENTORY MANAGEMENT 4.1. Making Adequate Availability of Inventories • The main objective of inventory management is to ensure the availability of inventories as per requirements all the times. This is because both shortage and surplus of inventories prove costly to the organization. In case of shortage of availability in inventories, the manufacturing wheel comes to a grinding halt. The consequence is either less production or no production. • The either case results in less sale to less revenue to less profit or more loss. On the other hand, surplus in inventories means lying inventories idle for some time implying cash blocked in inventories. Speaking alternatively, this also means that had the organization invested money blocked in inventories invested elsewhere in the business, it would have earned a certain return to the organization. Not only that, it would have also reduced the carrying cost of inventories and, in turn, increased profits to that extent. 4.2. Minimizing Costs and Investments in Inventories • Closely related to the above objective is to minimize both costs as well as volume of investment in inventories in the organization. This is achieved mainly by ensuring required volume of inventories in the organization all the times. • This benefits organization mainly in two ways. One, cash is not blocked in idle inventories which can be invested elsewhere to earn some return. Second, it will reduce the carrying costs which, in turn, will increase profits. In lump sum, inventory management, if done properly, can bring down costs and increase the revenue of a firm. 5. OBJECTIVE OF THE PAPER • To analyze and evaluate the inventory management policies of selected petrochemical companies in India • To study the inventory turnover ratio of the selected petrochemical companies in India • To compare the inventory turnover ratio of the selected petrochemical companies in India • To make suggestions/comments about the uniformity of the inventory turnover ratio of the selected petrochemical companies in India. 5.1. Hypothesis H0: null Hypothesis There is no significant difference in inventory turnover ratio of the selected companies H1: Alternative Hypothesis There is significant difference in inventory turnover ratio of the selected companies 6. DATA ANALYSIS BPCL HPCL IOCL MRPL Mar '16 15.92 15.58 10.64 15.92 Mar '15 17.52 16.75 10.27 18.36 Mar '14 14.21 12.38 7.68 8.9 Mar '13 15.02 12.58 7.93 9.78 Mar '12 13.29 9.17 7.44 6.88 http://www.iaeme.com/IJM/index.asp 429 editor@iaeme.com
Dr. Varsha Nerlekar and Swapnil Patel 20 18 16 14 12 BPCL 10 HPCL 8 IOCL 6 MRPL 4 2 0 Mar '16 Mar '15 Mar '14 Mar '13 Mar '12 BPCL HPCL IOCL MRPL Mean 15.192 Mean 13.292 Mean 8.792 Mean 11.968 Standard Standard Standard Standard Deviation 1.624890766 Deviation 2.980029 Deviation 1.533548 Deviation 4.913341 Sample Sample Sample Variance 2.64027 Sample Variance 8.88057 Variance 2.35177 Variance 24.14092 Minimum 13.29 Minimum 9.17 Minimum 7.44 Minimum 6.88 Maximum 17.52 Maximum 16.75 Maximum 10.64 Maximum 18.36 Sum 75.96 Sum 66.46 Sum 43.96 Sum 59.84 Count 5 Count 5 Count 5 Count 5 The average inventory turnover ratio of BPCL is 12.192 times per year and it ranges from minimum level of 13.29 to maximum of 17.96 times in a year between the study periods. It can be seen that the ratio of HPCL has been decreased to 13.292 as compare to BPCL , also IOCL average ITR has been drastically decreased to 8.792 times. But average ITR of MRPL has been increased to 11.968. The average ITR of HPCL is 13.292 which ranges from minimum of 9.17 times to maximum maximu of 16.75. The average ITR of IOCL is 8.792 which ranges from minimum of 7.44 to maximum of 10.64. 10.64 The average ITR of MRPL is 11.968 which ranges from minimum of 6.88 to maximum of 18.36. 18.36 The standard deviation is lowest in IOCL that is 1.533 which means that it is less volatile and the inventory is kept at minimum fluctuation and MRPL shows the maximum fluctuation in the mean average. 6.1. ANOVA: Single Factor Summary Groups Count Sum Average Variance BPCL 5 75.96 15.192 2.64027 HPCL 5 66.46 13.292 8.88057 IOCL 5 43.96 8.792 2.35177 MRPL 5 59.84 11.968 24.14092 http://www.iaeme.com/IJM IJM/index.asp 430 editor@iaeme.com
An Empirical Analysis of Inventory Efficiency of Major Refineries in India ANOVA Source of Variation SS df MS F P-value F crit Between Groups 108.8177 3 36.27255 3.816805 0.030822 3.238872 Within Groups 152.0541 16 9.503383 Total 260.8718 19 Tukey Test Q 4.04 T 2.673733 Difference Rel – ioc 0.721569 not sig ioc-bpcl 6.710998 significant rel-bpcl 5.989428 significant This ratio is computed by dividing the cost of goods sold by the average Stock. This ratio indicates the speed with which the Stock is converted into sales. In general, a high ratio indicate efficient performance since an improvement in the ratio shows that either the same volume of sales has been minted with a lower investment in stocks, or the volume of sales has increased without any increase in the amount of stock. A too high ratio may be the result of very low Stock levels which may result in frequent stock-outs and thus the firm may incur high stock out costs. Thus, a firm should have a satisfactory ratio. The objective of computing this ratio is to determine the efficiency with which its stock is converted into sales. It is seen that BPCL is doing quite good since it is converting its inventory to sales in 15.192 times throughout the years. 6.2. Analysis of ANOVA test HYPOTHESIS H0: null Hypothesis There is no significant difference in inventory turnover ratio of the selected companies H1: Alternative Hypothesis There is significant difference in inventory turnover ratio of the selected companies Level of significance: 5% Degree of freedom: 19 F critical:3.238872 Calculated value of F:3.816805 F cal > F crictical This indicates that the calculated value of F is3.816805 and the critical value of F is3.238872 at 5% significance level. So the calculated value of F is greater than the critical value of F which means that null hypothesis is rejected and alternate hypothesis is accepted. It indicates that there is significant in the inventory turnover ratio of the selected companies. Now since the null hypothesis is rejected, Tukey tests come into existence. Tukey test indicates the significant difference between the selected companies. http://www.iaeme.com/IJM/index.asp 431 editor@iaeme.com
Dr. Varsha Nerlekar and Swapnil Patel Companies Difference BPCL-HPCL 1.9 not significant HPCL-IOCL 4.5 not significant IOCL-MRPL 3.176 not significant BPCL-MRPL 3.224 not significant BPCL-IOCL 6.4 Significant HPCL-MRPL 1.324 not significant So from the above test it is seen that there is a significant difference between BPCL-IOCL that is 6.4 while the combination of other companies has no significant difference. 7. CONCLUSION The companies are not having problem in managing the inventory. Also from statistical tools used in the study proves that BPCL and IOCL have significant difference since there is a huge demand of petroleum there is no problem of accumulation of inventories. REFERENCES [1] Cristina Caffarra; “The Role and Behavior of Oil Inventories”; Oxford Institute for Energy Studies; GW04 1990. [2] Amy Myers Jaffe, Ronald Soligo; “The role of inventories in oil market stability”; The Quarterly Review of Economics and Finance 42 (2002) 401–415 [3] Pradip Kumar Krishnadevarajan, S. Balasubramanian, N. Kannan and Vignesh Ravichandran. A M ult i - Criteria Decision Framework for Inventory Management. International Journal of Management (IJM), 7 (1), 2016, pp. 85-93. [4] nature.berkeley.edu/er100/sections/Week2_IEA_energy_statistics_manual-oil-Annex.pdf [5] Inventories & the Strategic Petroleum Reserve; Declaration of Independents-Oil & Gas Products; http://oilindependents.org/inventories-the-strategic-petroleum-reserve/ [6] http://www.ibef.org/industry/oil-gas-india.aspx [7] http://www.accountingtools.com/dictionary-inventory [8] Dr. I. Francis Gnanasekar, Personal Finance is more Personal than it is Finance: A Study on Factors Influencing Investment Choice on Investments in Tiruchirappalli City Corporation, Tamil Nadu. International Journal of Management (IJM) , 7(7), 2016, pp. 265–270 http://www.iaeme.com/IJM/index.asp 432 editor@iaeme.com