THE MANAGEMENT OF

INVENTORY IN SUPPLY CHAIN

Industrial Engineering Department – University of Sumatera Utara

 01 THE FUNCTION OF INVENTORY IN SUPPLY CHAIN

02 THE MEASURING INSTRUMENT OF INVENTORY

TABLE OF 03 THE KIND OF INVENTORIES

CONTENTS
04 THE TRADE OFFS INVENTORY
IN SUPPLY CHAIN

05 THE MODEL OF INVENTORIES

06 VENDOR MANAGED INVENTORY

Industrial Engineering Department – University of Sumatera Utara
THE FUNCTION OF INVENTORY
THE FUNCTION OF INVENTORY
THE EXAMPLE Industrial Engineering Department – University of Sumatera Utara
 5500
PRODUCTION

5320
FACTORY OF BISCUIT

ACTUAL DEMAND

The biscuit factory produce biscuit type A for this year.

Actual demand is 5.320 even though the production is
5.500. The inventory appear because the uncertainty of
demand. Could it be that the request was just only
5.320? It must be 180 leftover of biscuits. The answer is
not only because of the fluctuative demand, but also the
distribution system. Maybe the distribution system is
not good enough.
Industrial Engineering Department – University of Sumatera Utara
 THE FUNCTION OF
INVENTORY
The uncertainty demand by the company will make the
company to produce using the make to stock method. So, this
will cause inventory. Uncertainty is not only effected by
demand but also on internal supply and operations. So, that’s
the function of inventory.
Industrial Engineering Department – University of Sumatera Utara
THE MEASURING INSTRUMENT OF INVENTORY
WHAT ARE THE MEASURING INSTRUMENTS OF INVENTORY?
 INVENTORY TURN OVER RATE

INSTRUMENTS INVENTORY DAYS OF SUPPLY

FILL RATE

SERVICE LEVEL AND RECORD ACCURACY

Industrial Engineering Department – University of Sumatera Utara

 Measures how many times or how fast inventory is turn to
INVENTORY the customers relative to those kept in the warehouse.

TURNOVER RATE Sales Value in a Year

Turnover rate = ---------------------------------------
Inventory Value
The higher turnover ratio means
the better for the company

Industrial Engineering Department – University of Sumatera Utara

 THE EXAMPLE

SELLS
+- 150 types of products
Company
DATA :
The average of Inventory is 3 billion rupiahs. The sales value is 40 billion
rupiahs in a year and 25 % is margin. The inventory value sold in a year is 30
billion, so the turnover is 10 times in a year.
Turnover ratio = 30 billion / 3 billion = 10 times / year
Industrial Engineering Department – University of Sumatera Utara
 The number of days can cover the average inventory.
Influenced by procurement lead times, demand patterns,
INVENTORY prices, and supply uncertainties.
DAYS OF SUPPLY The Average of Inventory
Inventory Days of Supply : ------------------------------------------
The Average of Consumption

Industrial Engineering Department – University of Sumatera Utara

 THE EXAMPLE

SELLS
+- 150 types of products
Company
DATA :
The company same with the example for turnover ratio. The company operated
300 days in a year. So, the value of inventory in a day is 30 billion / 300 days is
0,10 billion. The inventory days of supply is 3 billion in a day / 0,10 billion =
30 days. The inventory is needed for 30 working days.
Industrial Engineering Department – University of Sumatera Utara
THE KIND OF INVENTORIES
 CLASSIFICATION OF INVENTORIES

BASED ON
THEIR RAW MATERIAL

STATUS
WORK IN PROCESS

FINISHED PRODUCT
Industrial Engineering Department – University of Sumatera Utara
 CLASSIFICATION OF INVENTORIES

PIPELINE / TRANSIT
INVENTORY

CYCLE STOCK
BASED ON THE
FUNCTION

ANTICIPATION
STOCK SAFETY STOCK
Industrial Engineering Department – University of Sumatera Utara
 CLASSIFICATION OF INVENTORIES

BASED ON DEPENDENT
DEMAND ITEM

BILL OF MATERIAL IS INDEPENDENT

BETWEEN TWO ITEMS

Industrial Engineering Department – University of Sumatera Utara

THE TRADE OFFS INVENTORY IN SUPPLY CHAIN
 01 ORDERING COST

THERE ARE 02 RECEIVING AND INSPECTIONS

RELEVANT COSTS

INVENTORY 03 HOLDING OR CARRYING

COSTS
COST
04 SHORTAGE COSTS

Industrial Engineering Department – University of Sumatera Utara

 Unlike for products with stable demand, the tradeoff is not between
ordering and inventory holding costs, but between: overstocking and
shortage costs.

Overstocking is when products sold with markdown costs or even disposed

Shortage is when the lost of opportunity and lost of future customers

TRADE OFF

Industrial Engineering Department – University of Sumatera Utara

THE MODEL OF INVENTORY
INVENTORY MODEL WITH STABLE DEMAND

ECONOMIC ORDER QUANTITY

(Without Coordination)
When a type of item is consumed quite continuously in
almost a constant rate, there is a simple model to apply
to determine the optimal order quantity such that the
total inventory cost is minimum. Total inventory costs
consist of ordering cost and inventory holding cost.
The model:
Total cost = Order cost + Holding cost

D Q 2CoD
TC (Q)  Co  h Q* 
Q 2 h

Where D = annual demand

Co = order cost
h = inventory holding cost
 ECONOMIC
ORDER QUANTITY
Example :
A baking company produces bread using flour as main
raw material. The production time for company is 1
year = 365 days. The price for 1 ton flour is Rp.
5.000.000,- Annual inventory holding cost is about
25% of the inventory value. The inventory
administration is 0,25 million rupiahs. Determine
optimal order quantity.

2Cb D
Q= ( )
h

Q= 2 𝑋 𝑅𝑝. 0,25 𝑗𝑢𝑡𝑎 𝑥 365 /1,25 = 12 ton

INVENTORY MODEL WITH STABLE DEMAND
ECONOMIC ORDER QUANTITY
(With Coordination)
The weakness of the traditional EOQ is that it views
cost from the perspective of the buyer only. If there is
cost incurred to the supplier associated with each order
placed by the buyer, an integrated model can be
developed.
2( As  Ab) D
Q
(hs  hb)
Where:
As = fixed order processing cost incurred to the supplier
Ab = fixed order cost incurred to the buyer
D = annual demand
hs = inventory holding cost to the supplier
hb = inventory holding cost to the buyer
 JOINT ORDERING POLICIES:
AN EXAMPLE FOR PRODUCTS WITH STABLE DEMAND

A factory with demand in a year is 10.000.

Buyer (Order Cost) = 200
(Inventory Holding Cost) =4
Supplier (Order Processing Cost) = 800
(Inventory Holding Cost) =3
Determine the Optimal Order Quantity and the cost
between supplier and buyer with two conditions
a. Without Integration = Scenario 1
b. With Integration = Scenario 2

D 10000 10000 10000

Ab 200 200 200
hb 4 4 4
As 800 800 800
hs 3 3 3

Scenario 1 Scenario 2
Q 1000 1690,3085
TCb 4000 4563,833 Scenario 1
TCs 9500 7268,3266 and Scenario
TC(b+s) 13500 11832,16 2
 JOINT ORDERING POLICIES:
AN EXAMPLE FOR PRODUCTS WITH STABLE DEMAND

A factory with demand in a year is 10.000.

Buyer (Order Cost) = 200
(Inventory Holding Cost) =4
Supplier (Order Processing Cost) = 800
(Inventory Holding Cost) =3
Determine the Optimal Order Quantity and the cost
between supplier and buyer with two conditions
a. Without Integration = Scenario 1
b. With Integration = Scenario 2

STANDARD MODEL INTEGRATED MODEL

EOQ = 1000 EOQ = 1690

16000
13500
14000 11832
12000
9500
10000
7269
8000
6000 4000 4563
4000
2000
0
Buyer's Supplier's TC

Non integrated Integrated

What is required to make the models work?
Industrial Engineering Department – University of Sumatera Utara
WILLINGNESS TO SHARE COSTS DATA

WILLINGNESS TO WORK TOGETHER TO

ESTABLISH JOINT PLAN
 DETECTING EARLY RESPONSE
200 200

150 150
realisasi

realisasi
100 100

50 50

0 0
0 50 100 150 200 0 50 100 150 200
ramalan ramalan
Generate forecast Receive first Receive 2nd order
Submit first order Order

OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG

Only possible with
reduced lead time
Leftover units
Are discounted
Observe Feb & March
Sales & submit 2nd order

REACTIVE CAPACITY APPROACH Industrial Engineering Department – University of Sumatera Utara

VENDOR MANAGED INVENTORY
Industrial Engineering Department – University of Sumatera Utara
 Distributed By
CORTESE
THE BENEFITS ARE

Cortese does not decide on

the size and time of
ordering but only provides
inventory information and
sales data.
STOCKOUT INVENTORY

Industrial Engineering Department – University of Sumatera Utara