CHAPTER I INTRODUCTION

Transcription

1 CHAPTER I INTRODUCTION 1.1. Research Background Generally, inventory is one of the biggest assets on the balance sheet of a company. Therefore, inventory management should be effectively deployed for reducing inventory investment, and maximize throughput. Besides, effective inventory management improves service provided to customers (Lee & Billington, (1992) and Sage (2014)). The inventory should be maintained at the optimum level, neither be excessive nor inadequate. Excessive inventory investment leads to decrease firm s profitability as the result more cost of fund being tied up to unnecessary inventory. Besides, it requires higher holding cost of large space needed. There is also a possibility that the excessive inventory may be damaged, misused and lost during longer storage time. In other hand, insufficient inventory levels lead shortage problem may interrupt the operation. Moreover, the worst consequence of inventory stock-out could be losing the customers as they shift to the competitors(stevenson, 2004). The complexity of inventory management in practice constitutes with factors that complicate the process, such as the nature of both supply and demand. Unpredictable supply because of material quality, seasonality, perishability, and supply chain disruption are should be considered when determining inventoryrelated policies to ensure an adequate safety lead-time supply. On the demand side, the economic condition, sales traffics and new product development also contributes to the stocking level determination (Sage, 2014). 14

2 Yet with all of the supply and demand complexities, an effective inventory management is fundamentally required. Waroeng Spesial Sambalas a food service business could deploy an effective inventory management to minimize the inventory investment. The complexity of managing inventory levels of the food service is even higher than manufacturing firms as the result of demand uncertainty of restaurant customer. Production plan of manufacturing firm can be scheduled so that material demand can be accurately predicted based on the plan. Meanwhile, customer demand of restaurant fluctuates and cannot be preciselypredicted as production plans. Hence, Waroeng Spesial Sambal faces shortage risks when actual salesexceed the predicted demand. Onthe other hand, when the businessholdsa large amount of inventory, it also faces risk costs includes obsolescence and damage costs. Food ingredients will deteriorate during storage beyond its shelf life. This research seeks to determine the inventory replenishment plans for minimizing total inventory cost. The study begins withabc classification analysis for identifying very important materials should be prioritized in the inventory control. Then, the study is continued with demand forecasting of the most important material. Next, the economic order quantity is calculated with consideration of the obsolescence related costs. Further, the safety stock isdetermined to includeexpected service levelfor protecting against out-of-stock condition. Finally, the total inventory cost of corresponding order levels is determined for assessing potential inventory investment can be saved by the application of the economic order quantity method. 15

3 1.2. Problem Definition Stock-out and excessive ofraw material have beena persistent problem at Waroeng Spesial Sambal. Demand fluctuation is not well anticipated, hence, the inventory shortages often force small orders to be placed during the review period(interview Rahmayani Dewi, 5 September 2014). As the result, frequent small orders increase the ordering costs include transportation expenditure from the supplier (or traditional market) to thecentral warehouse. Additionally, small purchases often require higherpurchase price than the bulky size order. In other hand, some other materials are excessiveand stored for more than 8 days in the warehouse.this condition drives up the carrying cost as it requires higher handling cost as well as the obsolescence cost during storage. Moreover, excessive perishable materials often should be resaleat very cheap price (Interview Rubiah, 27 September 2014). Meanwhile, interview results and observation also reveals inadequate inventory replenishment planning in Waroeng Spesial Sambal. There is a discrepancy between purchase quantity and actual material demand that is not well accommodate in material purchase planning. As the replenishment cycle is short, the purchase planning should be responsive in anticipating the demand fluctuation. However, the required material levels during the short cycles are not well predicted and intuition often plays in the order quantity calculation.furthermore, intuition is based on the historical material consumption 16

4 that often does not consider customer demand variance over the seasonal or other irregular events. According to the interviewee s response: Currently, estimation of material order level is based on intuition, we didn t have material purchase planning that precisely calculates material needs based on recipes. Research in material planning will helps us in overcoming the overstock problems (Rubiah, Finance Manager). We didn t have such planning technique for estimating and converting customer demand into material needs. The material ordercalculation is based on habitude, for instance, if only during the last week, our material purchase is 5 kg and it was adequate to fulfill one day need, we will place 5 kg order for daily consumption during this week. So that, it (purchase planning) is not based on conversion of sales demand (into material needs) (Edi Santoso, Head of Production). Often, we have to order small quantities because of the urgent needs (Rahmayani Dewi, Procuremet Planning staff). We were lack of anticipation of special events such as demand during the fist or last week in a month, that is problem that we found during our last (internal) meeting. However, we have considered increasing demand over the weekend (Edi Santoso, Head of Production). This condition is worsened by infrequent communication between warehouse staff who responsible in calculating order and operational staff who understand the actual sales demand. Therefore, when actual demand fluctuates from the regular demand, the business faces risk of shortage and excessive material. Hence, it is Waroeng Spesial Sambal s vision is to formulate a replenishment plan that minimizesdeviation of the order quantity and the actual need, as well as decreases the inventory-related costs Research Problem Statement Intuition-based material purchase plan leads to a discrepancy between the purchase quantity and the actual needs. Itcause shortage and frequent small 17

5 purchases problems at Waroeng Spesial Sambal. Besides, the discrepancy could also lead excessive inventory problems Research Questions Based on the research problem statement, research questions can be identified as the following list: 1. Which ingredients are considered as very important (Class A) materials? 2. What is forecasting model that can be used for the corresponding menu of each Class A materials for the period November 2014 until June 2015? 3. What is the corresponding Economic Order Quantity (EOQ) and propose target inventory levels of Class A materials for the period November 2014 until June 2015? 4. What are the corresponding safety stock (SS) and reorder point (ROP) levels of Class A materials for the period November2014 until June 2015? 5. How much total inventory cost can be saved by the application of the propose inventory levels? 1.5. Research Purpose The research purposesinclude: 1. To identify which ingredientsconsidered as very important (Class A) materials. 2. To identifythe appropriate forecasting model for the corresponding menu of each of the Class A materials for the period November 2014 until June

6 3. To determine the corresponding Economic Order Quantity (EOQ) and propose target inventory levels of Class A materials for the periodnovember 2014 until June To determine the corresponding safety stock (SS) and reorder point (ROP) levels of Class A materials for the period November 2014 until June To determine total inventory cost of can be saved by the application of the propose inventory levels Research Benefit practitioners: The research is expected to be useful for both academicians and 1. Academies benefit: the research can be one of the study about the application of ABC analysis, forecasting techniques, EOQ methods, safety stocks and reorder point levels for determining inventory-related policies in the food service business. 2. Practical benefit: the result of this research is expected to be an input for Waroeng Spesial Sambal to determine inventory replenishment-related policies Research Scope Based on the research background described above, the study will be focused on the inventory purchase plan of Waroeng Spesial Sambal in Yogyakarta 19

7 region. Further, considering the limitation of the study period, the research only observes the replenishment planning of very important ingredients that are classified into Class A materials. The research observes data during January 2013 until August 2014 (last months of data collection was started) for material classification in the ABC analysis. The chosen data timeframe is also used for forecasting and is expected to be able to represent the demand trend within a year. Besides, it also considers the absence of new menu launched. Therefore, the historical data can represent a snapshot of demand trend without irregular variation may produce from the new menu. Further, forecasting only predicts future demand during November until December 2014 as the remaining of the second semiannual period (when this research is conducted), as well as January until June 2015 as the next semiannual period. The timeframe considers the budgeting plan time horizon that covers the semiannual sales target during January until June and July until December periods Systematic of Writing This research is followed the systematic of writing as listed below: a. CHAPTER I: INTRODUCTION This chapter consists of research background, problem definition, research purpose, research scope and limitation and systematic writing. 20

8 b. CHAPTER II:LITERATURE REVIEW This chapter consists of literature studies that is usedas a basic reference for interpretation the research result. This section also used for formulating the concept of inventory models which can be used for the research. c. CHAPTER III:RESEARCH METHOD AND COMPANY PROFILE This chapter contains method development includes research type and data source, data collection methods, data analysis method. This section also explores profile of the company as the research object. d. CHAPTER IV:RESEARCH RESULT AND ANALYSIS This chapter discusses comprehensively about the research result and analysis. e. CHAPTER V:CONCLUSION AND RECOMMENDATION This chapter contains the conclusion, managerial implications, research limitation as well asa recommendation for the future research. 21