Kelompok 5

Mata Kuliah: Manajemen Rantai Pasok

Dosen Pengampu: Okin Ringan Purba, SE. MM

Nama-nama Anggota:

1. Said Saleh Alkatiri 19B505011136

2. Helena Putri Patricia 19B505011027
3. Theresia Friska Busa Owa 19B505011146
4. Muhamad Wildanul Hakim 19B505011197
5. Adam Falahi Ridho 19B505011120

Managing Uncertainty

Inventory

 Definition

Generally Inventory refers to all goods, products, merchandise and materials held by a business for sale
in the market for a profit.

Example: If a newspaper seller uses a vehicle to deliver newspapers to customers, only the newspapers
are considered inventory. The vehicle will be treated as an asset.

 Inventory in manufacturing industry

In the manufacturing business, inventory is not only the final product that is produced and ready to be
sold, but also the raw materials used in production and semi-finished goods in the warehouse or on the
factory floor.

Example: For a cake manufacturer, inventory would include cake packages ready for sale, stock of semi-
finished cakes that have not been refrigerated or packaged, pastries set aside for quality checks, and raw
materials such as sugar, milk, and flour.

 Inventory in the service industry

In the service industry, because there is no physical exchange, inventory is largely intangible. So, service
industry inventory mostly includes the steps involved before finalizing a sale.

Example: For a research consulting firm, the inventory consists of all the information collected for a
project. In the hotel industry, vacant rooms become supplies for their owners.

Inventory decisions are both high risk and high impact throughout the supply chain. Inventory
committed to support future sales drives a number of anticipatory supply chain activities. Without the
proper inventory assortment, lost sales and customer dissatisfaction may occur. Likewise, inventory
planning is critical to procurement and manufacturing. Material or component shortages can shut down
manufacturing or force production schedule modification, added cost, and potential finished goods
shortages. Just as shortages can disrupt marketing and manufacturing plans, inventory overstocks also
create operating problems. Overstocks increase cost and reduce profitability as a result of added
warehousing space, working capital, insurance, taxes, and obsolescence. Management of inventory
resources requires an understanding of functionality, principles, cost, impact, and dynamics.

Inventory Management

Inventory management focuses on inventory risk, which varies depending upon a firm’s position in the
distribution channel. The typical dimensions of inventory risk relate to time duration, depth, and
breadth of commitment. The following describes the risks that will be experienced by manufacturers,
wholesalers and retailers.

 For a manufacturer, inventory risk is long-term. The manufacturer’s inventory commitment

begins with raw material and component parts acquisition, includes work-in-process, and ends
with finished goods. In addition, finished goods are often pre-positioned in warehouses in
anticipation of customer demand. In some situations, manufacturers are required to consign
inventory to customer facilities as well. For example, many mass merchants require
manufacturers to stock their products on retail store shelves and wait for payment until
consumers purchase the products (i.e., consignment inventory). In effect, this practice shifts all
inventory risk to the manufacturer. Although a manufacturer typically has a narrower product
line (e.g., manufacturers have fewer products) than a retailer or wholesaler, the manufacturer’s
inventory commitment is deep and of long duration.
 A wholesaler purchases large quantities from manufacturers and sells smaller quantities to
retailers. The economic justification of a wholesaler is the capability to provide customers an
assortment of merchandise from different manufacturers in reduced quantities. When products
are seasonal, the wholesaler may be required to take an inventory position far in advance of the
selling season, thus increasing depth and duration of risk. One of the greatest challenges of
wholesaling is product-line expansion to the point where the width of inventory risk approaches
that of the retailer while depth and duration of risk remain characteristic of traditional
wholesaling. In recent years, powerful retailers have driven a substantial increase in depth and
duration by shifting inventory responsibility back to manufacturers or wholesalers.
 For a retailer, inventory management is about the velocity of buying and selling. Retailers
purchase a wide variety of products and assume substantial risk in the marketing process. Retail
inventory risk can be viewed as broad but not deep. Due to the high cost of store location and
space, retailers place prime emphasis on inventory turnover. Inventory turnover is a measure of
inventory velocity and is calculated as the ratio of sales for a time period divided by average
inventory. Although retailers assume a position of risk on a wide variety of products, their
position on any one product is not deep. Faced with this breadth of inventory, retailers attempt
to reduce risk by pressing manufacturers and wholesalers to assume greater and greater
inventory responsibility. Pushing inventory back up the channel has resulted in retailer demand
for fast delivery of mixed-product shipments from wholesalers and manufacturers. Specialty
retailers, in contrast to mass merchandisers, normally experience less width of inventory risk as
 a result of handling narrower assortments. However, they must assume greater risk with respect
to depth and duration of inventory holding.

If a business plans to operate at more than one level of the distribution channel, it must be prepared to
assume the associated inventory risk. For example, a food chain that operates a regional warehouse
assumes risk related to wholesale functionality over and above normal retail operations. To the extent
that an enterprise becomes vertically integrated, inventory must be managed at multiple levels of the
supply chain.

Inventory Functionality

 Production process. If there is inventory in a company that experiences ups and downs,
additional inventory in the production process is needed from suppliers.
 Separating holes. Companies must be able to segregate demand and provide inventory that will
provide choices for customers. Inventory is generally sold by retailers.
 Profit. Can be obtained in large quantities, because the purchase in large quantities will reduce
the cost of production or delivery of goods.
 Keeping Inflation. Can keep the effects of inflation and price increases that suddenly occur in the
market.

Inventory Type

Inventory types may differ depending on what industry. The following is an explanation of the types of
inventory. Here we use a baking company as an example.

1) Raw material

Raw materials from all goods to be processed and become the final product. In a company, raw
materials are raw materials that are the core material for the production stage. The concept of
raw materials as inventory only exists in the manufacturing industry. Because in the trading
industry there is no processing and manufacturing process, therefore there are no raw
materials.

For example: In a cake manufacturing company, the raw materials are items such as milk,
sugar, and flour which are used in various stages of production. When we talk about raw
materials, it is important to understand that the raw materials used by manufacturing
companies can be sourced from suppliers or be a by-product of a process. In cake
manufacturing companies, most of the raw materials are sourced from various suppliers.
However, in a sugar-making company, only sugar cane is imported from different farmers.
When processed in factories to extract the juice, the residue is known as bagasse. The juice is
sent to be boiled and the bagasse is used as fuel. Here, sugar cane, juice, and bagasse will all
be processed as raw materials.

2) Work In Process
 Raw materials are sent for processing but have not been approved for finished goods, this
stage can be called work in progress.

From the example of a cake manufacturing company, after the raw materials are processed
and the cakes are molded, they undergo a quality check before being sent for final packaging.
All cakes awaiting quality check are considered in process. Simply put, the work-in-process
category consists of all goods that have been processed but have not yet been shipped for
sale.

3) Finished goods

What is meant by finished goods are final goods that are ready to be sold in the market. This
product has gone through all the processes and stages of production or product quality checks.

So for cake manufacturers, the final package of cakes that are sent to the market for sale after
undergoing quality checks will become the finished goods.

4) Buffer Inventory

In a manufacturing or trading business, market fluctuations and movements are not always
predictable. Such changes could have a negative impact on sales or production processes,
which could lead to out-of-stock situations. What is meant by Inventory buffer is to
compensate for this. Buffer inventory (also known as safety stock), consists of goods held in
store or factory warehouses to cushion the impact of unexpected demand. Sudden surges in
demand, transportation delays, or labor strikes can be managed if adequate buffer supplies are
maintained.

An example of buffer inventory from a cake-making company, for example, is that they stock
up on ingredients to make cakes so that when there is a sudden demand they make it right
away and don't run out of stock.

5) Inventory MRO

MRO stands for Maintenance Repairing and Operating supplies, this type of inventory is mostly
relevant for the manufacturing industry. MRO items are not counted as inventory items on the
books, but they play an important role in the day-to-day work of the organization. MRO
inventory is used for the maintenance, repair, and maintenance of machines, tools, and other
equipment used in the production process. Some examples of MRO items are lubricants,
coolants, uniforms and gloves, nuts, bolts, and screws.

6) Decoupling inventory

Most of the production is done by many machines. The output of one machine is fed to the
next machine for further processing. However, the process only works smoothly if all the
machines are working simultaneously. A malfunction in one machine can derail the entire
process, and that's why Decoupling inventory is needed. Decoupling inventory is made up of
items that are held in reserve for processing by another machine if the previous machine fails
to produce its usual output.
 In the baking example, for example, after the dough is molded, it goes into the oven to be
baked. To prevent damage to any of the presses that could delay the baking process, the
manufacturer may keep a few extra pieces of molded dough that can be sent to the oven for
baking while the machine is being serviced.

7) Inventory control

Inventory control is an inventory management activity that aims to maximize the use of a
company's inventory in order to minimize losses and gain profits from these activities.

8) Inventory in transit

Inventory in transit refers to goods that are moved from one location to another, such as raw
materials transported to factories by rail or finished goods transported to stores by trucks.

Inventory Carrying Cost

Inventory carrying cost is the expense associated with maintaining or holding inventory. Inventory
expense is calculated by multiplying annual inventory carrying cost percent by average inventory value.
Standard accounting practice is to value inventory at purchase or standard manufacturing cost rather
than at selling price. Determining carrying cost percent requires assignment of inventory-related costs.
Financial accounts relevant to inventory carrying cost percent are capital, insurance, obsolescence,
storage, and taxes.

1. Capital

The cost of capital may vary significantly by firm and industry. Firms that are aggressive in uses
of cash will typically employ a higher cost of capital percentage. Similarly, industries with high
value or short life cycle product will employ a higher cost of capital to drive lower inventories.
For example, electronics or pharmaceutical firms may use high capital rates (20–30%) since
they expect high returns on their development investments and their products have short life
cycles, while food and beverage manufacturers may accept lower hurdle rates (5–15%) since
they have longer product life cycles and relatively lower risk.

2. Taxes

Local taxing authorities in many areas assess taxes on inventory held in warehouses. The tax
rate and means of assessment vary by location. The tax expense is usually a direct levy based
on average inventory value on a specific day of the year or average inventory value over a
period of time. In many cases tax exemption such as free port status is available from local and
state taxing authorities.

3. Insurance

Insurance cost is an expense based upon estimated risk or loss over time. Loss risk depends on
the product and the facility storing the product. For example, high-value products that are
easily stolen and hazardous products result in high insurance cost. Insurance cost is also
 influenced by facility characteristics such as security cameras and sprinkler systems that might
help reduce risk.

4. Obsolescence

Obsolescence cost results from deterioration of product during storage. A prime example of
obsolescence is product that ages beyond recommended sell-by date, such as food and
pharmaceuticals. Obsolescence also includes financial loss when a product no longer has
fashion appeal or no longer has any demand. Obsolescence costs are typically estimated on
the basis of past experience concerning markdowns, donations, or quantity destroyed. This
expense is the percent of average inventory value declared obsolete each year.

5. Storage

Storage cost is facility expense related to product holding rather than product handling.
Storage cost must be allocated on the requirements of specific products since it is not related
directly to inventory value. In public or contract warehouses, storage charges are billed based
on average inventory in the facility. The cost of total annual occupancy for a given product can
then be assigned by multiplying the average daily physical space occupied by the standard cost
per facility dimension for a specified time.

Planning Inventory

Inventory planning consists of determining when and how much to order. When to order is determined
by demand and replenishment lead time average and uncertainty. How much to order is determined by
the order quantity. Inventory control is the process of monitoring inventory status.

1) When to order

When to order judging from the reorder. the reorder point defines when a replenishment shipment
should be initiated. A reorder point can be specified in terms of units or days’ supply. This discussion
focuses on determining reorder points under conditions of demand and performance cycle certainty.

To determine the reorder point used the formula :

R=D×T

(This formula is used when a shipment arrives on schedule)

Where,

R = Reorder point in units;

D = Average daily demand in units; and

T = Average performance cycle length in days.

To illustrate this calculation, assume demand of 20 units/day and a 10-day performance cycle. In this
case, R = D × T = 20 units/day × 10 days = 200 units.
However, When uncertainty exists in either demand or performance cycle length, safety stock is
required. When safety stock is necessary to accommodate uncertainty, the reorder point formula is:

R = D × T + SS

Where,

R = Reorder point in units;

D = Average daily demand in units;

T = Average performance cycle length in days; and

SS = Safety stock in units.

2) How much to order

In determining how much to order used the EOQ formula. The EOQ is the replenishment quantity that
minimizes the combined inventory carrying and ordering cost. Identification of such a quantity assumes
that demand and costs are relatively stable throughout the year. Since EOQ is calculated on an individual
product basis, the basic formulation does not consider the impact of joint ordering of multiple products.

The standard formulation for EOQ is:

EOQ=2CODCiU

Where,

EOQ = Economic order quantity;

Co = Cost per order;

Ci = Annual inventory carrying cost;

D = Annual sales volume, units; and

U = Cost per unit

Tips for Effective Inventory Management

1) Knowing your inventory priority

Categorizing your inventory into priority groups can help you understand which items you need
to order more and more often, and which ones are important to your business but may be more
expensive and slower moving. Experts usually recommend separating your inventory into groups
A, B, and C. Items in group A are higher-priced items that you need less of. Items in category C
are low-cost items that can be returned quickly. Group B is in between: moderately priced items
and sells slower than item C but faster than item A.
2) Track all product information
Be sure to keep a record of product information for items in your inventory. This information
must include the SKU, barcode data, supplier and lot number. You might also consider tracking
 the cost of each item over time so you're aware of factors that can change costs, such as scarcity
and season of sale.
3) Analyze supplier performance
Unreliable suppliers can cause problems with your inventory. If you have a supplier who usually
ships late or short orders frequently, it's time to take action. Discuss the problem with your
supplier and find out what the problem is. Be prepared to change partners, or deal with
uncertain stock levels and possible stock outs as a result.
4) Be consistent in how you receive stock
It seems reasonable to make sure incoming inventory is processed, but do you have a standard
process that everyone follows, or does every employee who receives and processes incoming
stock do it differently? Minor differences in how new stock is picked up can leave you confused
at the end of the month or year, wondering why your value doesn't match your purchase order.
Ensure that all staff receiving stock do so in the same way, and that all transactions are verified,
received and unloaded together, calculated accurately, and checked for accuracy.
5) Track sales
Again, this seems unnecessary, but it does more than just add sales at the end of the day in
business. You must understand, on a daily basis, what items you are selling and in how much,
and update your total inventory. But beyond that, you need to analyze this data. Do you know
when certain items sell faster or decline? Is it a seasonal item? Are there certain days of the
week when you sell certain items? Are several items almost always sold together?
Understanding not only your total sales but the broader picture of how items sell is important
for keeping your inventory under control.
6) Order restock yourself
Some vendors offer to reorder inventory for you. On the surface, this seems like a good thing,
you save staff and time by letting someone else manage the process for at least some of your
items. But remember that your vendor does not have the same priorities as you. They want to
move their stuff, while you look for the most profitable inventory for your business. Take the
time to check inventory and order all your items yourself.
7) Use well-integrated technology
Inventory management software or accounting software is not the only technology that can help
you manage stock. Things like mobile scanners and POS systems can help keep you on track.
When investing in technology, prioritize integrated systems. Having a POS system that can't
communicate with inventory management software or accounting software isn't the end of the
world, but you may need extra time to transfer data from one system to another, making it easy
to end up with inaccurate inventory counts.

conclusion of inventory

Inventory is a key asset for any manufacturing or trading business, so it is important for business owners
to understand what it actually means. In addition to general definitions, certain industries such as
manufacturing and services use specific definitions that describe all assets relevant to that industry.
Knowing the different types of inventory, including types not specifically used in accounting, can help
business owners understand how inventory works for them. For the inventory management process,
you can do the tips above including using accounting software such as Accurate Online which has the
best bookkeeping features, inventory management, asset management, tax management and other
best features for your business.

Managing Uncertainty

Uncertainty is a source of difficulty in managing a supply chain. Uncertainty creates distrust of the plans
that have been made. As a result, companies often create creations along the supply chain. This safety in
the form of inventory (safety stock), time (safety time), or production capacity cannot be fulfilled. In
other words, the level of customer service will be lower in situations where uncertainty is high.

Uncertainty is always related to circumstances that have several possible events and impacts.
Uncertainty is often called "unexpected risk" or the unexpected risk of an event. Conditions of
uncertainty arise for several reasons, including:

1) The time interval from planning for losses until the activity ends. The longer the time interval,
the greater the uncertainty;
2) Limited availability of required information; and
3) Limited knowledge or skills or decision-making techniques.

Level Of Uncertainty

Uncertainty itself has many levels. There are several levels of uncertainty with their respective
characteristics.

a) Very High Uncertainty (Relatively Certain)

At a non-existent level of uncertainty, outcomes can be predicted with relative certainty. At
this level the condition of certainty is very high. The laws of nature are an example of such
uncertainty. For example, we can predict with certainty that the earth orbits the sun in 365 days
(one year).
b) Objective Uncertainty
The next level is objective uncertainty, for example dice, if we roll the dice, there are six
possibilities namely the numbers 1, 2, 3, 4, 5, and 6 (there are six possible outcomes). We can
calculate the probability of each number to come out which is 1/6.
c) Subjective Uncertainty
Subjective uncertainty contains a psychological meaning, namely an atmosphere of thought
filled with doubt or awareness of a lack of knowledge about the outcome of an event. Such
uncertainty is called subjective uncertainty, namely the individual's assessment (based on his
behavior, experience, and knowledge) of an objective situation.
An example is a car accident. Identification of outcomes and probabilities associated with car
accidents is more difficult. For example, if we go outside by car, what is the probability that we
will have a car accident? and if there is an accident, damage or loss what will we get? It is not
easy to answer this question.
d) Uncertainty Very Uncertain
 Highly uncertain uncertainty is uncertainty that is clearly difficult to predict or identify the
outcome of an event. Example of space exploration. We do not know what results will be
obtained from space exploration, whether to meet alien beings, or find a planet similar to Earth,
or what we will find. It is very difficult to predict or identify the possible outcomes of such space
exploration. Of course it will also be very difficult to determine the probabilities for each of
these possible outcomes.

Uncertainty in the Supply Chain:

SCM aims to fulfill these customer demands by involving actors and related parties in the supply chain.
Based on the source, there are three main classifications of uncertainty in the supply chain.

1) Demand Uncertainty

Sales forecasting estimates unit demand during the inventory replenishment cycle. Even with good
forecasting, demand during replenishment cycle typically exceeds or falls short of what is planned. To
protect against a stockout when demand exceeds forecast, safety stock is added to base inventory.
Under conditions of demand uncertainty, average inventory represents one-half order quantity plus
safety stock.
a) Product Variation
The variety of products needed or requested by customers is very diverse. These variations
include brands, sizes, and others.
b) Product quantity variation
 Customers need products in various quantities. For a particular product, for example, a
customer requires a small amount of product (in units), while another customer requires it
in large quantities (in cartons or pallets).
 The difference in the quantity of high customer demand will increase the uncertainty in the
supply chain.
c) Difference in lot size
• The lot size of a product required by customers is different. For example, for a certain
product, the customer requires the product in a package containing 12 units, while at other
times or another customer requires the product in a package containing 24 units.
• This difference in lot size will affect the uncertainty in the supply chain. The greater the
difference in lot sizes, the greater the uncertainty in the supply chain.
d) Response time
• Request response times can vary widely. For pharmaceutical products, for example,
response times to requests from pharmacies or hospitals can be very loose. However,
the response time to requests for pharmaceutical products for emergencies (eg for
surgery) can be very narrow.
• If the required response time is narrow, it will result in high uncertainty in the supply
chain.
e) Service level
• The level of service varies depending on the characteristics of the customer and the level of
need at that time. Delivery of spare parts for emergency conditions in an oil drilling area,
for example, must be carried out as soon as possible. However, delivery of the same spare
parts for maintenance purposes can be carried out for a longer period of time.
• Demand for high levels of service will increase uncertainty in the supply chain.
f) Product price sensitivity
• Prices of products that can be accepted by customers can be different. For a certain
condition, the price of the product is not sensitive for the customer. However, under
other conditions, the price of the product will be sensitive.
• For most customers, the prices of products in supermarkets, for example, are quite
sensitive. Most customers buy products in supermarkets in large enough quantities as
monthly shopping for daily needs. However, the prices of the same products in
convenience stores are not a sensitive matter. Customers only occasionally buy products
there mainly because of its location and in small quantities.
• The price of sensitive products causes supply chain uncertainty to be high.

2) Supply Uncertainty
 a) Product quality
• The quality of the resulting product may vary or change depending on several factors. In
relation to the product life cycle, for example, the quality of the product during the
introduction period is usually lower than the next period. The quality of this product can
also change due to the quality of raw materials, conditions of production machines,
operator skills, and others.
• If product quality is low, supply chain uncertainty will be high.
b) Product innovation rate
• The level of product innovation is indicated by the frequency of changes to the product. The
high level of product innovation can be seen in mobile phone products. On the other hand,
the low level of product innovation can be seen in basic necessities, such as rice, sugar,
cooking oil, and etc.
• If the level of product innovation is high, supply chain uncertainty will increase.
c) Limited production capacity
• Production capacity shows the number of products that can be produced in a certain
period of time. Production capacity has certain limitations, for example related to the
capacity of the production machines used, the availability of operators, and etc.
• Limited production capacity results in high uncertainty in the supply chain.
d) Flexibility of production capacity
• Companies can make changes to the level of production, namely the number of
products produced in a production process. However, this change cannot always be
done easily because of the limited flexibility of the production capacity.
• Low flexibility of production capacity will increase supply chain uncertainty.
e) Disruption to production facilities
• Production facilities may experience disruptions that result in the production process being
stopped for a period of time. Such disturbances include power outages, engine damage,
and etc.
• A high frequency of disruption will increase the uncertainty in the supply chain.

3) Internal uncertainty

Internal uncertainty is usually caused by machine breakdowns, imperfect machine performance,

absence of labor, and uncertainty in time and quality of production. The amount of uncertainty faced by
each supply chain is different. In most cases, customer demand is considered to dominate supply chain
uncertainty, but of course there are also many cases where uncertainty in the supply of raw materials or
components becomes a more dominant issue.

Uncertainty in the Airline Industry:

Flight operations are complicated and complex processes. The complicated and complexity of flight
operations requires the support of sophisticated transportation systems. To run smoothly, a flight
operation must go through various stages of a long process. The process begins with the availability of a
flight schedule for passengers and consignors.

After the reservation process, passenger and consignor will receive a reservation code. Meanwhile, the
aircraft will be operated by flight crews (pilots and flight attendants), with safety assurance from
engineering. Sophisticated air transportation management systems must be able to combine the
interests of passengers and flight crew. These two different entities must be coordinated with one
reliable flight schedule system. The flight schedule itself is supported by other schedules such as: aircraft
schedule, crew schedule and passenger itineraries. Each flight operation will be equipped with a flight
plan, an itinerary based on destination points in the airspace. The flight crew must also be able to meet
the legal requirements for each destination to be visited.

Therefore, any disruptions in the process will result in irregular flight operations. Irregular operations
are one of the operational risks that are triggered by internal or external factors. Irregular operations
will appear constantly due to interference from various factors, both technical and non-technical. These
factors include: weather, mechanics, airports. Some examples of irregular operations that often occur
include: overbooking, cancellation, late arrival and diversion. Incidents of irregular operations vary
widely, starting from events with small losses (minor loss) to events that cause very large losses (major
loss). One example of a minor loss is the provision of compensation to passengers or shippers for
overbooking.