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- An empirical analysis of inventory efficiency of major refineries in India
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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
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- 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)
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- 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.
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- 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
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- 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
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- 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.
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- 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
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