FINAL THESIS – TI 141501

DEVELOPMENT OF INVENTORY PERFORMANCE

SYSTEM FOR CONSUMABLE GOODS IN
UNIVERSITY

Taufan Andhika Nugraha

NRP. 024 115 40000 096

Supervisor:
Prof. Iwan Vanany, ST., M.T. Ph. D

DEPARTMENT OF INDUSTRIAL ENGINEERING

FACULTY OF INDUSTRIAL TECHNOLOGY
INSTITUT TEKNOLOGI SEPULUH NOPEMBER
SURABAYA
2019
 TABLE OF CONTENTS

CHAPTER 1 INTRODUCTION ........................................................................... 1

1.1 Background .............................................................................................. 1

1.2 Problem Formulation ................................................................................ 4

1.3 Objectives of Research ............................................................................. 4

1.4 Benefits of Research ................................................................................. 4

1.5 Scope ........................................................................................................ 4

1.5.1 Limitations ........................................................................................ 5

1.5.2 Assumption ....................................................................................... 5

1.6 Research Outline ...................................................................................... 5

CHAPTER 2 LITERATURE REVIEW ................................................................. 7

2.1 Inventory .................................................................................................. 7

2.2 Inventory Management ............................................................................. 9

2.3 Performance Measurement ..................................................................... 11

2.3.1 Inventory Performance System ....................................................... 13

2.4 Indicator in Inventory Management ....................................................... 14

2.4.1 Inventory Turnover ......................................................................... 14

2.4.2 Inventory Days of Supply ............................................................... 15

2.4.3 Cash-to-Cash Cycle Time ............................................................... 16

2.4.4 Inventory Carrying Cost .................................................................. 17

2.4.5 Perfect Order ................................................................................... 17

2.5 Consumable Goods................................................................................. 18

2.6 Analytical Hierarchy Process ................................................................. 19

2.7 Continuous Improvement Techniques .................................................... 20

2.7.1 Failure Mode and Effect Analysis................................................... 21

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 2.7.2 Root Cause Analysis ........................................................................ 22

CHAPTER 3 RESEARCH METHODOLOGY ................................................... 24

3.1 Problem Identification Stage .................................................................. 26

3.1.1 Study of Literature ........................................................................... 27

3.1.2 Field Observation ............................................................................ 27

3.2 Model development and Data Collecting Stage ..................................... 27

3.2.1 Model Development ........................................................................ 27

3.2.2 Data Collecting ................................................................................ 28

3.3 Data Processing and Performance Measurement Stage .......................... 28

3.4 Analysis and Discussion Stage ............................................................... 29

3.5 Conclusion and Suggestion Stage ........................................................... 29

REFERENCES ...................................................................................................... 31

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 LIST OF FIGURES

Figure 3. 1 Research Methodology Flowchart ...................................................... 25

Figure 3. 2 Research Methodology Flowchart (Cont.) ......................................... 26

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 CHAPTER 1
INTRODUCTION

In this chapter, the introduction regarding to this research will be discussed.

The introduction will include the background of this research, problem formulation,
objectives, benefits, scope which consists of limitations and assumptions, and the
systematic report outline for this research.

1.1 Background
Nowadays, the industry is faced with increasingly competitive market
conditions and increasingly dynamic consumer demand. This requires companies
to strive harder in developing their business so they can get maximum profits and
achieve an optimal level of customer satisfaction. To deal with these conditions,
companies must be able to formulate the right strategies. One of the way is by
applying the supply chain management concept. The increase of demand
uncertainty makes inventory management has to play as an important role in supply
chain optimization. Furthermore, a research by Kumar and Ganguli (2009) stated
that the cost of inventory is one of the biggest portions of the total cost of supply
chain activities as well as a fundamental consideration of management. Therefore,
the inventory management should be properly managed in order to keep the
company’s supply chain running smoothly and efficiently.
Inventory is always been a double-edged sword for companies. On the
positive side, holding inventory will make the company be able to support the
business quickly. On the other hand, the negative side that they have to be
considered is the problem of the cost of inventories and potentially obsolescence
(Elliott, 1998). In recent years, a number of companies have faced numerous
challenges especially in inventory or material control, thus affecting the
performance of companies. There have been cases of materials overstocking which
eventually get expired or out dated, under stocking, lack of stock-taking, theft of
materials by workers and delays in deliveries of materials into the companies among
others. Concerning about those problems, there are many companies all over the

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world who have already started to adopt the concept of inventory management.
According to Pandey, (2002) the objectives of inventory management are: To
maintain a large size of inventory for efficient, smooth production and sales
operation, and to maintain a minimum investment in inventory to maximize
profitability. If properly executed, there is no doubt that inventory management will
enhance company’s operation and profitability. However, in practice, not all
companies that have implemented an inventory management system obtain
favorable results for the company's performance. That can be caused by various
things. One of them is due to the absence of a comprehensive inventory
performance measurement framework within the company (Lee & Billington,
1992).
There are several important aspects in supply chain management such as
performance measurement and continuous improvement (Pujawan &
Mahendrawathi, 2010). To create effective performance management, a
measurement system is needed that is able to evaluate supply chain performance
holistically. As already mentioned earlier, inventory management is a key element
that determines the success of a supply chain management. So if a company is going
to make a supply chain performance measurement system, then inventory must be
the main consideration. Furthermore, some attempts have been made to structure
performance measurement in terms of different categories or levels (Neely, et al.,
1995). Nevertheless, these approaches are not well applicable in the context of
inventory management.
Fattah, et al. (2016) presented an analysis of the inventory performance
system by combining two models: the Supply Chain Operations Reference (SCOR)
model and Batch Deterministic and Stochastic Petri Nets. The model allowed them
to calculate some performance indicators and those indicators will help to monitor
the activity of stock management system. Meanwhile, van Heck, et al. (2010) tried
to improve an inventory management performance by developing a framework
called Process-Oriented Measurement Framework. In this research, a generic
framework is developed by using a Business Intelligence approach to select the key
performance indicators (KPIs) and then the framework is tested using expert’s
opinion and two case studies in the health care sector. Although all the previous

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studies mentioned above have succeeded in providing improvements to the systems
they examined, the results of these studies have not been fully perfect because the
same framework is not necessarily suitable if applied to different systems. This
indicates that there is still some room for future research. One of them is that there
has never been a study that analyze the performance of consumable goods inventory
management in university or educational institution.
In this research, University X is chosen as the case study. As a higher
educational institution, University X core activity is to provide teaching and
learning facilities to its students. University X consists of several faculties that focus
on specific disciplines and some work units that assist the operations of university
with their respective functions. In carrying out its activities, the university cannot
be separated from the use of consumable goods. They refer to products that are used
recurrently, such as paper, pens, toner, and etc. Since they are not categorized as
perishable product, they usually bought with bulk purchasing. It means that
university has to deal with huge amount of items and in really various types. So, in
order to facilitate the management of consumable goods that involve in its
operations, University X formed a work unit that is dedicated to maintain the
availability and supply of items needed by university. In total there are more than
500 items managed by that work unit. Those items then divided into five broad
categories, namely accessories, electrical equipment, printing equipment, office
equipment, and cleaning equipment. If viewed from the way of their procurement,
those items are also divided into two categories, namely stock items and pre-order
items.
Even though they already have a pretty good ERP system, this unit currently
do not have a comprehensive performance measurement system. Therefore, through
this research, an inventory performance system of consumable goods is tried to be
developed by using University X as the case study and referring to existing
frameworks from previous researches, such as SCOR model, Process-Oriented
Measurement Framework, and etc. After that, measurement of the inventory
performance will also be executed in order to get an insight of the current condition
of observed object. Finally, evaluation and suggestions for improvement can be
given in the end based on the result of measurement.

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1.2 Problem Formulation
Based on the background explained before, this research aims to develop a
model of inventory performance system for consumable goods in university,
measure the existing inventory management performance of University X by using
the model that has been developed in this research, and provide recommendations
of improvement based on the result of measurement.

1.3 Objectives of Research

The objectives that are willing to be achieved by conducting this research
are mentioned as follows:
1. To develop an inventory performance system of consumable goods in
university.
2. To measure and analyze the existing inventory management performance of
University X.
3. To propose recommendations of improvement in inventory management for
University X that based on the result of evaluation.

1.4 Benefits of Research

The benefits that will be able to be obtained by conducting this research are
mentioned as follows:
1. Provide a new inventory performance measurement model that focuses on
consumable goods at the university.
2. Provide information and evaluation regarding the current inventory
management performance for University X based on measurements that
have been done in this research.
3. Provide recommendations of improvement for a better inventory
management performance in University X.

1.5 Scope
In this subchapter will be explained the scope of this research that includes
the limitations and assumptions.

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1.5.1 Limitations
The limitations used in this research are mentioned as follows:
1. Data processing carried out in this research is based on inventory
management data at University X in 2018 from ERP.
2. The object that became the focus of this research is stock-type consumable
goods managed by the type University X.

1.5.2 Assumption
The assumption used in this study is that there is no change in policies and
strategies from institution or government that can affect the condition of inventory
management at University X.

1.6 Research Outline

The research report outline provides the big picture of this research report,
which can be seen below:

CHAPTER I: INTRODUCTION
This chapter is the initial chapter of this research report, which contains the
research background, problem formulation, research objectives, research benefits,
and research scope, along with an outline of this research report, which serves as a
big picture of this research report’s writing sequence, at the end of the chapter.

CHAPTER II: LITERATURE REVIEW

This chapter provides the theories and concepts that support this research in
order to help the readers to understand this research easier and help the readers to
have the same perspective as the writer, in the form of literature review. The sources
used in the literature review include books, journals, and previous research that are
in accordance with the problems to be resolved.

CHAPTER III: RESEARCH METHODOLOGY

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 This chapter shows the methodology used in conducting this research, in the
form of a flow chart with explanations. The methodology starts with the study of
the system, up to the conclusions and suggestions.

CHAPTER IV: DATA COLLECTION AND PROCESSING

This chapter describes the data gathering process performed, then shows the
data processing that aims to find and process data to solve the problems formulated,
and achieve the objectives of the research.

CHAPTER V: ANALYSIS AND INTERPRETATION

This explains the analysis of results and interpretation of data from data
collection and processing that has been done. Data interpretation is a detailed and
systematic description of the results of data processing. The results obtained from
data processing are the answers to the problems formulated, and become the basis
for drawing conclusions and providing recommendations / suggestions.

CHAPTER VI: CONCLUSION AND RECOMMENDATION

This chapter is the last chapter of this research, which consists of the
conclusions and the recommendations. The conclusions that can be drawn will be
elaborated to answer all of the research objectives, while the recommendation will
be given to the observation objects of this research, which is the observed object
and also to the future researchers who wish to conduct similar or more advanced
research regarding this topic.

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 CHAPTER 2
LITERATURE REVIEW

In this chapter, the literature review related to this Final Project will be
explained and discussed. Here, the theory and concept of inventory, inventory
management, performance measurement and its application for inventory,
indicators in inventory management, characteristics of consumable goods,
Analytical Hierarchy Process, and few example of continuous improvement
techniques. The literature review will be used as the reference for data processing
as well as inventory performance measurement designing process.

2.1 Inventory
Inventory is defined as available material, or other tangible assets, stock on
hand, which can be calculated and measured in a specific period of time (Tersine,
1994). Inventory control and management are common problems faced by various
organizations in economic sector. Generally, inventory exists in manufacturers,
wholesalers, retailers, distributors, hospitals, and many others. Even in this
research, inventory is also occurred in educational institution. Inventory occurs due
to uncertainty, location differences, and economical motives (Pujawan &
Mahendrawathi, 2010).
Tersine (1994) stated that inventory has several key functions in fulfilling
company’s needs, namely:
1. Minimize the risk of raw materials, or any other desired goods, delivery
lateness which could disturb production process.
2. Minimize the risk of accepting low quality raw materials, or any other
goods, which have been ordered.
3. Minimize the risk of inflation.
4. Minimize the risk of stock out that lead to lost sales.
5. Maintain customer’s goodwill (opportunity costs).
6. Increase customer service level, since availability of products get higher.

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 7. Can be allocated to stock seasonal raw material so that company will not
suffer from raw material scarcity in market.

According to Render and Heizer (2006), based on the manufacturing

process inventory is divided into four types, namely:
a. Raw Material Inventory
Inventory purchased but not processed. This inventory can be
used to decouple suppliers from the production process.
b. Work-in-Process Inventory
A raw material or component that has undergone several changes
but has not been completed yet. The existence of work in process is
caused by the time needed to make a product (called the cycle time).
Reducing the cycle time means reducing inventory.
c. Maintenance, Repairs and Operations (MRO) Inventory
Inventories that are used to keep production machinery and
processes productive. MROs remain available because the needs and
timing of maintenance and repair of some equipment is unknown.
d. Finished Goods Inventory.
The product that is finished and is waiting for delivery. Finished
goods can be stored because future customer demand is unknown.

Whereas according to Ristono (2009), based on the purpose of inventory is

divided into three types, namely as follows:
a. Safety Stock
Inventories that are carried out to anticipate elements of
uncertainty in demand and supply. If the safety stock is not able to
anticipate these uncertainties, there will be a stock out.
b. Anticipation Stock
Anticipation stock or also called stabilization stock is inventory
that is done to deal with fluctuations in demand that can be predicted
previously.
c. Transit Stock

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 Inventory that is still in shipping. This inventory is divided into
two categories, namely: 1) External transit stock is inventory that is still
in transportation. 2) Internal transit stock is inventory that is still
waiting to be processed or waiting before being transferred.

2.2 Inventory Management

According to Stevenson (2010), inventory management is defined as a
framework employed in firms in controlling its interest in inventory. It includes the
recording and observing of stock level, estimating future request, and settling on
when and how to arrange. The application of inventory management affects the
sustainability of the operations process and improves the quality of service to
consumers. Basically there are three important questions about inventory control,
namely; ‘where will the items be stored? ', ‘when should the company order goods
to suppliers?' and ‘how many orders must be made? '(Waters, 2003). Inventories
must be arranged in such a way that the company's business processes remain stable
under any circumstances, but still pay attention to the amount of goods stored so
that the investment costs incurred due to storage do not harm the company.
There are several inventory management functions for companies including:
1. Ease in ensuring supplies through safety stock.
2. Provides free time for managing production and purchasing.
3. Anticipating changes in demand and supply.
4. Eliminating or reducing the risk of late material delivery.
5. Provide convenience in adjusting to the production schedule.
6. Eliminating or reducing the risk of price increases.
7. Maintain seasonal supplies of material produced.
8. Anticipating predictable requests.
9. Benefit from quantity discount.
10. Commitment to customers.

In addition, as for some things that must be considered in planning inventory

management are as follows.
1. Cost

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 According to Rangkuti (1996), there are several cost elements that need to
be considered in inventory management, namely:
a. Holding cost or carrying cost which consists of costs that vary directly
with the quantity of inventory. Costs that include in carrying costs, for
example, storage facility costs, capital costs, and inventory insurance
costs.
b. Ordering cost or procurement cost which includes expedition costs,
packing and weighing costs, inspection costs, etc. In general, ordering
costs do not increase if the order quantity increases. However, if more
and more components are ordered each time the message, the number of
orders per period drops, the total ordering costs will decrease.
c. Shortage costs are costs incurred if the supply is not sufficient for
material demand. Costs that include shortages of sample materials are
loss of sales, loss of subscriptions, and special booking fees. The cost of
shortage of materials is difficult to measure in practice, especially
because in reality these costs are often an opportunity cost, which is
difficult to estimate objectively.
2. Human Resource
In implementing an inventory management system, human resources are
responsible for the sustainability of inventory management which affects the
continuity of the production process. There are several things about human
resources that need to be considered in the application of inventory
management, including:
a. HR responsible for maintenance.
b. HR who are responsible for calculating and estimating stock
requirements.
c. HR responsible for administration of goods in and out.
d. HR that is responsible for checking the quality of goods.
e. HR who are responsible for receipt and inspection of purchases.
3. Management System
According to Ristono (2009) management system is a reflection of the
company's management policies that are realized in delivery policies, ways

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 of payment, recording costs, and so on. There are several things from the
management system that are related to the implementation of inventory
management, including:
a. Calculation of data needs in the future.
b. Project scheduling.
c. Policy determines stock and buffer.
d. Determine scheduling in ordering goods.
e. Coordination between divisions
4. Supporting Technology
The role of technology is a competitive strategy in the industrial world.
Supporting technology is used to support a work system that can benefit
users. There are several things related to supporting technology, including:
a. Supporting technology in calculating needs estimation.
b. Supporting technology in the procurement system.
c. Supporting technology in checking item mutations.
d. Supporting technology in checking the quality of goods.
e. Supporting technology in detecting goods needs.
5. Market Survey and Study
In applying inventory management companies must cooperate with outside
parties (suppliers / suppliers). This is related to the supplier's ability to
provide goods when the order is done.

2.3 Performance Measurement

Traditionally, performance measurement is defined as the process of
quantifying the effectiveness and efficiency of action (Neely et al., 1995). In
modern business management, performance measurement goes well beyond merely
quantification and accounting. It is supposed to contribute much more to business
management and performance improvement in the industries. According to Lynch
and Cross (1993), the benefits of a good performance measurement system are as
follows:

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 a. Tracing performance against customer expectations so that it will bring the
company closer to its customers and make all people in the organization
involved in efforts to give satisfaction to customers.
b. Motivate employees to do service as part of the customer and internal
supplier chain.
c. Identifying various wastes while at the same time encouraging reduction of
waste.
d. Making a strategic goal that is usually still blurred becomes more concrete
so that it speeds up the organizational learning process.

Neely and Kennerly (2002) succeeded in formulating what should be in a

performance measurement system that would provide guidance for managers and
consultants in making a performance measurement system for organizations, as
follows:
1. Performance measurement must be able to monitor efficiency and
effectiveness to achieve organizational strategy goals
2. Can describe overall organizational performance
3. The existence of supporting facilities. The existence of supporting facilities
is expected to be able to provide information to be compared, sorted,
analyzed, and interpreted.
4. Support the objectives of the organizational strategy (strategic objective) /
Performance measurement systems should be derived from the objectives
of the organization's strategy.
5. Having the right balance. It is important to design a performance
measurement system that considers the balance between non-financial and
financial aspects that are believed to support the success of the organization.
6. Has limited performance indicators. Measuring and analyzing performance
requires data collection, so it is important for organizations to limit
performance indicators by only selecting key performance indicators.
7. Easy to accept. It is important for organizations to design their performance
measurement systems by easily accessing performance information, using
it easily, and easily understand what has been evaluated.

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 8. The Key Performance Indicator (KPI) must be specified. The KPI that
should have clear objectives and the definition is not ambiguous for
employees who use it.

2.3.1 Inventory Performance System

Steward (1995) found that for organizations to outperform needs to focus
on four key areas ; (1) delivery performance; (2) flexibility and responsiveness; (3)
logistics cost ; and (4) asset management. Kaplan and Norton (1996) identified five
perspectives for performance measurement: financial, customers, internal
processes, innovation and improvement, and employees. Due to this, company must
focus and take into serious the inventory control and management towards their
business. Therefore, several studies have been conducted which aim to create
inventory performance measurement systems with various methods and in different
industrial sectors.
Fattah, et al. (2016) in their research combined two models, which are
Supply Chain Operations Reference (SCOR) model and the Batch Deterministic
and Stochastic Petri Nets (BDSPNs). The main idea of this work is to start with the
definition and measurement of performance indicators based on a reference static
model, appropriate and dedicated to the field; it is the SCOR model that offers a
large number of indicators. Then, they modeled and simulated the stock
management system through a case study by a high-performance dynamic model,
namely BDSPNs. The rich BDSPNs model allowed them to easily assess important
performance indicators of the stock management system that we had already
defined through the SCOR model. They selected the stock management policy with
continuous review (s, S) and the level 2 of the SCOR sourcing process source make-
to-order product (s2) to model, evaluate, and analyze the performance of inventory
management systems. Finally, a resolution of the stochastic process associated with
the warehouse management system by following indicators: average stock, average
cost of stock, profitability of an empty stock, and average supply frequency can be
given to reveal that some indicators need to be improved.
While, van Heck, et al. (2010) developed a framework for measuring
inventory management performance. By analyzing the inventory management

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business process, eleven potential benefits are indicated. Next, key performance
indicators (KPIs) are selected to measure the performance of sub-processes by using
a Business Intelligence approach. Putting this together yields an IM framework that
is used to obtain a generic, coherent picture of IM processes in different
organizations. The proposed framework is tested using experts’ opinions and two
case studies in health care sector. The experts’ comments yielded a list of top-10
KPIs. The case study results show that some of the potential benefits are also
observed in practice. Future research may reveal that comparable performance
improvements are possible in other ERP domains based on similar measurement
frameworks.

2.4 Indicator in Inventory Management

Inventory is one of the most significant costs for many businesses so
ensuring its optimization is often a key company objective. Then, Inventory
Performance is a measure of how effectively and efficiently inventory is used and
replenished. Many Lean practitioners claim that inventory performance is the single
best indicator of the overall operational performance of a facility. To have an in-
depth look at a business, the thing that has to do is take a look at their inventory
management metrics. These inventory metrics and other key performance
indicators (KPIs) can tell right away how a business defines itself, conveying the
trends most important to the company.
The purpose of using metrics and KPIs across inventory control systems is
to drive the most effective behaviors, decisions and strategies possible. Moreover,
KPIs enable companies of all sizes to measure the impact of business operations.
When it comes to inventory management, there are several metrics worth
considering. Since every company is different, selecting the best metrics needs to
begin with careful considerations. Below, five commonly used yet essential
inventory management KPI’s and metrics to consider are listed.

2.4.1 Inventory Turnover

Inventory turnover measures how many times a manufacturer’s inventory is
sold and replaced, or turned over, in a specific period. It is calculated to see if a

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business has an excessive inventory in comparison to its sales level. Calculating
inventory turnover can help businesses make better decisions on pricing,
manufacturing, marketing and purchasing new inventory. The formula to calculate
inventory turnover are as follows:

Net Sales
Inventory Turnover = (2.1)
Average Inventory

or

Cost of Goods Sold

Inventory Turnover = (2.2)
Average Inventory

where

Beginning Inventory  Ending Inventory

Average Inventory = (2.3)
2

Inventory turnover measures the efficiency of the business overall, with a

higher turnover generally meaning greater efficiency. However, while some items
that are carried may have slower turnovers than others, they may be worth the extra
time they spend on the shelf if they are good money-makers for the business. Slow
inventory turnover has another implication – the longer a company holds onto
inventory, the more likely it will be damaged or become outdated. If inventory
turnover is slowing, watch out for dying stock.

2.4.2 Inventory Days of Supply

Inventory days of supply also known as inventory days on hand or days
sales of inventory measures the number of consumption days currently in stock (i.e.
the number of days it would take to deplete current stock levels). Basically this
metric tells how many days the current inventory will last based on the sales levels.
Inventory days of supply is very similar to inventory turnover ratio and both

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measure the efficiency of a business in managing its inventory. If the period is one
year, the formula of inventory days of supply are as follows:

Average Inventory
Inventory Days of Supply =  365 (2.4)
Cost of Goods Sold

This is equivalent to the 'average days to sell the inventory' which is calculated as
(Weygandt, et al., 1996):

365 days
Average Days to Sell Inventory = (2.5)
Inventory Turnover Ratio

When the number is high, it may indicate that inventory movement is

inefficient. However, the optimum days to sell inventory varies depending on the
industry. For large ticket items, they typically move slower than lower-priced
products.

2.4.3 Cash-to-Cash Cycle Time

Cash-to-cash cycle time is the period between when a business pays cash to
its suppliers for inventory and receives cash from its customers. Usually a company
acquires inventory on credit, which results in accounts payable. The company will
then sell the inventory on credit, which results in accounts receivable. Cash is
therefore not involved until the company pays the accounts payable and collects
accounts receivable. So the cash conversion cycle measures the time between outlay
of cash and the cash recovery. The mathematical formula for cash-to-cash cycle
time is represented as (Pujawan & Mahendrawathi, 2010):

Cash-to-Cash Cycle Time = Inventory days of supply

+ average days of acc. receivable (2.6)
- average days of acc. payable

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 Generally, the lower number to better. A trend of decreasing or steady cash-
to-cash cycle time values over multiple periods is a good sign, while rising ones
should lead to more investigation and analysis based on other factors. The shorter
the cycle, the more working capital a business generates, and the less it has to
borrow.

2.4.4 Inventory Carrying Cost

Carrying cost, carrying cost of inventory or holding cost refers to the total
cost of holding inventory. This includes warehousing costs such as rent, utilities
and salaries, financial costs such as opportunity cost, and inventory costs related to
perishability, shrinkage (leakage) and insurance (Russel & Taylor, 2006). This KPI
tells how much money will be spend (as a percentage) to hold and store the
inventory annually. The formula to calculate carrying cost is:

Overall Cost
Carrying Cost = (2.6)
Average Annual Inventory Cost

With a firm grasp on this KPI, how much profit the current inventory will
really bring and limit write-offs and write-downs can be known. It’s also a smart
idea to find ways to control carrying costs. When there are no transaction costs for
shipment, carrying costs are minimized when no excess inventory is held at all, as
in a Just-in-Time production system.

2.4.5 Perfect Order

The Supply Chain Council describes perfect order fulfillment as a discrete
measurement defined as the percentage of orders delivered to the right place, with
the right product, at the right time, in the right condition, in the right package, in
the right quantity, with the right documentation, to the right customer, with the
correct invoice. Failure to meet any of these conditions results in a less than perfect
order. The equation that defines the perfect order index (POI) or perfect order
performance is:

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 n

 Perfect Order
j 1
Perfect Order Ratio = 100% (2.7)
n

where:
 Perfect order = 1 (one) if all perfect order criteria were met, 0 (zero) if one
or more criteria were not met.
 n = Total number of orders or order lines delivered

A high perfect order rate can lead to increased customer satisfaction. The
majority of manufacturers are attaining a perfect order performance level of 90
percent or higher, according to The American Productivity and Quality Center
(APQC). The more configurable products are, the more difficult perfect order
performance is to attain.

2.5 Consumable Goods

Consumable goods are products that is used recurrently. It means that
consumables are goods used by individuals and businesses that must be replaced
regularly because they wear out or are used up. They can also be defined as the
components of an end product that is used up or permanently altered in the process
of manufacturing. Simply, it can be said that consumable are items which are
intended to be bought, used, and then replaced.
The following are few types of consumable goods:
1. Fast Moving Consumer Goods
Products that consumers buy on a regular basis that are used up quickly such
as food and cleaning supplies.
2. Construction
Goods that get used up in construction but aren't considered a material. This
can include small tools such as a hammer and minor materials such as glue,
weld rod and tape.
3. Medicine

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 Goods used in the diagnosis and treatment of disease and injuries such as
gloves, bandages, medicine and surgical disposables.
4. Maintenance
Supplies used to maintain and fix things such as fasteners, seals, lighting
components and bearings used to maintain aircraft.
5. Operating Supplies
Goods used up by a business as part of its operations. For example, printer
cartridges used in an office.
6. Hospitality
Goods used up by tourism related industries such as the soap in hotel rooms.

Consumable goods usually play an important role in the operational

activities of a company. So, it is a common thing to find large quantities of
consumable goods stored for future use. This is known as bulk purchasing. It is the
purchase of much larger than the usual, for a unit price that is lower than the usual.
Most of the consumable goods are bought with bulk purchasing.

2.6 Analytical Hierarchy Process

Analytical Hierarchy Process or commonly abbreviated as AHP, is a method
developed by Thomas L., Saaty in 1970. Practically speaking, AHP is a structured
technique for organizing and analyzing complex decisions, based on mathematics
and psychology. It has particular application in group decision making, and is used
around the world in a wide variety of decision situations, in fields such as
government, business, industry, healthcare, shipbuilding and education. Rather than
prescribing a "correct" decision, the AHP helps decision makers find one that best
suits their goal and their understanding of the problem (Madurika and
Hemakumara, 2015).
The AHP method looks at the problem in three parts. The first part is the
issue that needs to be resolved, the second part are the alternate solutions that are
available to solve the problem. The third and the most important part as far as the
AHP method is concerned in the criteria used to evaluate the alternative solutions.

19
According to Saaty (2008), the procedure that need to be done for using AHP is as
follows.
1. Define Alternatives
The AHP process begins by defining the alternatives that need to be
evaluated. These alternatives could be the different criteria that solutions
must be evaluated against. They could also be the different features of a
product that need to be weighted to better understand the customers
perception.
2. Define the Problem Criteria
According to AHP methodology, a problem is a related set of sub
problems. The AHP method therefore relies on breaking the problem
into a hierarchy of smaller problems. When to stop breaking the problem
into smaller sub problems is a subjective judgement.
3. Establish Priority amongst Criteria Using Pairwise Comparison
The AHP method uses pairwise comparison to create a matrix. In the
next matrix, there will be a pairwise comparison between one criteria
with another and so on. The managers will be expected to fill this data
as per the expectations of the end consumer or the people who are going
to use the process.
4. Check Consistency
A consistency ratio is calculated to check for consistency in making the
pair-wise comparisons. According to (Palma-Mendoza, 2014) if the
consistency ratio is less than 10%, then the pairwise comparison matrix
can be considered as having an acceptable consistency, otherwise the
judgements need to be checked.
5. Get the Relative Weight
Once the weighted criteria is ready, one can evaluate the alternatives to
get the best solution that matches their needs.

2.7 Continuous Improvement Techniques

Continuous improvement is one of the most important pillars of Lean. A
continuous improvement strategy is any policy or process within a workplace that

20
helps keep the focus on improving the way things are done on a regular basis. This
could be through regular incremental improvements or by focusing on achieving
larger process improvements. To provide structure to their continuous improvement
practice, many organizations choose to implement a continuous improvement
technique.
Over the years, numerous tools, techniques, and systems have been designed
to aid improvement. They vary in their rigidity of structure, but generally all aim to
eliminate waste and improve quality and efficiency of work processes. They are a
powerful resource in the lean manufacturing journey. Leveraging the right one can
lead to improved productivity, reduced errors, and greater profitability overall.

2.7.1 Failure Mode and Effect Analysis

Failure Mode and Effects Analysis (FMEA) is one of the tools used for
continuous quality improvement. FMEA is a structured analysis used for
identification of failure modes and their effects (Pickard et al., 2005). The aim of
the FMEA method is to consistently and systematically identify potential
defects/failures in the product, process or design and then eliminate them or
minimize the risks associated with them. This helps trigger continual improvement
when it is intelligently deployed – the more understanding about what could go
wrong, the better the ability to identify what needs to be done to prevent the possible
failing.
The steps in compiling FMEA according to McDermott (2009) are as
follows:
1. Determine the system to be analyzed.
2. Describe the system in a process map.
3. Analyzing stakeholders influences the system using Supplier Input
Process Output Customer Analysis (SIPOC Analysis).
4. Identify functions in each process.
5. Search for and determine potential failures for each function of the
section.

21
 6. Determine the impact (severity), potential failure (occurrence), and
potential detection of failure (detection) for each possible failure. The
following is an explanation of the severity, occurrence, and detection.
a. Severity is an assessment to show how much effect the failure mode
has on consumers and subsequent processes.
b. Occurrence is an assessment of the probability of the frequency of
the occurrence of a failure that will occur, so that failure modes can
be produced which have a certain impact on a system.
c. Detection is an assessment of the ability of a tool or control process
in detecting a failure in a system.
7. Calculate Risk Priority Number (RPN) for each potential failure event.
The critical failure potential is indicated by the largest RPN value.

RPN = Severity (S)  Occurrence (O)  Detection (D) (2.8)

8. Determine handling / mitigation for every possible critical failure. It is

necessary to determine the right compensation for each stakeholder
when a failure occurs.
9. Perform FMEA updates in the event of changes in design or process by
the company.

2.7.2 Root Cause Analysis

As well described in Briand (1995), casual analysis (or, in other terms, Root
Cause Analysis) is a technique appropriate to identify the causes and inner
mechanism that lead to costly or risky problems related to the quality of the
delivered products or the efficiency of the development process. As a consequence,
Root Cause Analysis (RCA) has been chosen as the technique supporting cause-
effect modelling, in conjunction with the well-known classifications proposed by
Ishikawa (Ishikawa & Loftus, 1990). The goal of RCA is the analysis of the problem
occurred for evaluating why it happened, in order to identify the root causes of the
problem, not simply the symptoms. RCA can be done with the Cause and Effect

22
Diagram or Fishbone Diagram approach designed to identify the cause of a problem
along with making causal relationships. Wolk (2009) developed cause and effect
diagram steps with the following procedure.
1. Determine the problems you want to analyze.
2. Draw an arrow from left to right and write the main problem you want to
analyze to the right of the arrow. This arrow will then become the main
arrow.
3. Determining factors or causes that might cause the main problem arises.
Draw another arrow for each factor, which leads to the main arrow.
4. Determine other factors that can cause problems that have been determined
in step "c". Draw another smaller arrow towards the arrow in step "c".

In addition to the cause and effect diagram, RCA can also be done with an
iterative approach of 5 whys, with the following procedure (Wedgwood, 2006).
1. Determine the problem that wants to know the cause. Problems are
described in as detailed and complete as possible so that the analysis to be
carried out becomes more focused.
2. Determine why these problems occur.
3. If the answer to the question (step 2) has not been able to identify the root
cause of the problem, then repeat the second step until the desired
conclusion is obtained.
4. Steps 2 and 3 will continue to be repeated until all relevant stakeholders
reach agreement on the root causes of the problems that arise. Repetition
(steps 2 and 3) that occur can be less or even more than 5 times.

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24
 CHAPTER 3
RESEARCH METHODOLOGY

In this chapter will be explained the methodology of the research.

Methodology is the steps used in completing the research. Those steps are made by
the author as a guide inS completing research systematically so that the research
objectives can be achieved. The research is started from the study of the system,
model development, model validation, data collection, data processing,
performance measurement, analysis and discussion, then conclusions and
suggestions. The flowchart of this research is displayed as follows.

START
Problem
Identification
Stage

Study of the System

 Identify the inventory management activities in

University X
 Identify the strategic objective of inventory
management in University X
 Determine the inventory management performance
attributes for University X
 Determine the key performance indicators (KPIs)
 Verify and validate the model

Model Development
and Data Collecting
NO Model Valid? Stage

YES

Figure 3. 1 Research Methodology Flowchart

25
 A

 Collect data of performance indicators target and

data to measure each performance indicator
 Determine the weight of attributes and
performance indicators using AHP

Data
 Determine the critical stock items in University X
Processing and
by using ABC Analysis Performance
 Measure each inventory management attribute and Measurement
KPI Stage
 Analyze the critical performance indicator

Evaluate the inventory

performance using
FMEA and RCA Analysis and
Discussion
Stage

Determine
improvement strategy

Conclusion and Analysis and

Discussion
Suggestion Stage

FINISH

Figure 3. 2 Research Methodology Flowchart (Cont.)

3.1 Problem Identification Stage

The problem identification phase is the initial stage in the implementation
of this research, in which the study of the system is conducted. The study of the
system consists of learning through literature studies and field observation. The
following is the explanation.

26
3.1.1 Study of Literature
This stage conducts learning activities related to literature reviews that
support the research objectives. The study of literature can be sourced from
journals, books, and previous research related to the research conducted. This stage
aims to be able to explore the problems and also the objectives of scientific research.
Searching and also reviewing literature in the form of books, scientific journals, and
articles to determine what concepts and theories are relevant and can also be used
in solving problems and achieving research objectives. The study of literature in
this research includes inventory and its management, performance measurement
and its application for inventory, the indicators that is used in inventory
management performance system, the characteristics of consumable goods, AHP as
one of the tools that is used in this research, and few continuous improvement
techniques such as FMEA and RCA that later will be used in this research

3.1.2 Field Observation

Field studies were conducted to determine the existing conditions in the
company. Field studies are also conducted by interviewing relevant stakeholders of
observed object and conducting reviews related to supporting data such as
achievement indicators. In addition, through this field observation a research gap
and the problem that aimed to be solved through this research is found, namely
development of inventory performance system for consumable goods in university.

3.2 Model development and Data Collecting Stage

At this stage, the model for measuring inventory performance for
consumable goods at the university is trying to be made. After the model is
constructed, verification and validation of the model is carried out. In addition, at
this stage the collection of data that is needed in the completion of this study is
conducted.

3.2.1 Model Development

The first step that must be done to design an inventory performance
measurement system is to identify inventory management activities that take place

27
at University X. Information about this is obtained through interviews with related
parties. Then, the design process is continued by identifying strategic objectives of
inventory management in University X. The next step is to determine inventory
performance attributes that refer to various previous references and research based
on the literature studies that have been carried out in the previous stage. After that,
the key performance indicator is determined so that the measurement metrics that
are most suitable for representing the strategic objectives and conditions of the
observed object are obtained. Finally, the final step is to verify and validate with
the object observers the models that have been made before later this model will be
used to measure inventory performance in University X.

3.2.2 Data Collecting

At this stage, all data collected is needed and will be used in the process of
completing this research. After the previous stage data about inventory management
activities and inventory performance indicators have been identified, then the target
of each performance indicator is to be obtained. The data can also be obtained
through interviews with observed object. In addition, data that will be used to do
measurement of performance indicators is also collected. These data are for
example, demand data for the past year, the amount of stock-type inventories stored,
inventory holding costs, etc.
Furthermore, at this stage data collection is also carried out to determine the
weight of each performance indicator. The method used is AHP by using
questionnaires as tools. A questionnaire will be distributed to several respondents
who are directly involved in the inventory management process to scale the weight
of each performance attribute based on fundamental pair-wise comparison score or
scale.

3.3 Data Processing and Performance Measurement Stage

This stage is done after the model has been verified and validated by the
object of observation and the required data has been collected. Data processing does
not only contain the process of measuring performance, but also includes
processing data that is carried out before performance measurements can be made.

28
This stage begins with determining the critical stock items in University X using
the ABC Analysis method. After that, the critical stock items are taken as a sample
of all consumable goods managed by University X. Then, inventory performance
measurement is carried out by using inventory performance measurement models
that have been made in the previous stage. The collected data is calculated using
formulas in accordance with existing performance indicators so that later the results
of inventory performance measurement will be obtained. From these results, it can
be found the critical inventory performance indicator that is exist in University X.

3.4 Analysis and Discussion Stage

This stage analyzes based on the results of the inventory performance
measurement at University X from the previous stage. This stage is done to
determine the critical parts of the inventory management process that have been
measured. Then the calculation is done using Failure Mode and Effect Analysis
(FMEA). For the analysis carried out using the Root Cause Analysis which is using
5 whys. From 5 whys then the root cause of the problem is obtained. From this
calculation the value of RPN is obtained from each potential event problem. The
greater the value of the RPN produced shows the priority for mitigation.
Then the determination of improvements that will be taken by the company
in order to improve the process. Determination of this improvement is obtained
from analyze results, which are the results of FMEA calculations. This
improvement is done by brainstorming to produce improvements that are in
accordance with the problems you want to solve. The output of this stage takes the
form of recommendations that can be made by the company. It is hoped that in the
future it can be used as a continuous improvement.

3.5 Conclusion and Suggestion Stage

This stage is the final stage in the research. At this stage conclusions and
suggestions will be drawn up. Conclusions and suggestions are prepared based on
the results of the analysis and interpretation that have been formulated previously.
Conclusions are formulated based on the research objectives that have been
determined. In addition, the advice made will be given as a proposal or

29
recommendation for the parties concerned and as the development of further
research. Especially in the field of inventory management performance.

30
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