FINAL PROJECT ANALYSIS OF INVENTORY COSTS IN PT. MUHTOMAS. By : Mochamad Aditya Pratama

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1 FINAL PROJECT ANALYSIS OF INVENTORY COSTS IN PT. MUHTOMAS By : Mochamad Aditya Pratama Undergraduate Program School of Business and Management Institut Teknologi Bandung

2 VALIDATION PAGE ANALYSIS OF INVENTORY COSTS IN PT. MUHTOMAS By : Mochamad Aditya Pratama Undergraduate Program School of Business and Management Institut Teknologi Bandung Validated By (Dr.Mursyid Hasan Basri) March 2010 ii

3 ANALYSIS OF INVENTORY COSTS IN PT. MUHTOMAS Mochamad Aditya Pratama Hearing Date : 11 march 2010 Graduation Date : 10 April 2010 Undergraduate Programs, Institut Teknologi Bandung Supervisor : Dr. Mursyid Hasan Basri ABSTRACT This cases study is designed to analyze the cost problem that happen in PT. Muhtomas. The company is producing calcium tins as their finished product from tins 99.9% that also called Pure-Leads. This company has a problem with their profit. Although the company s revenue is increased in 2007 and 2008, the company still not make a bigger profit compared from last year. So, the problem must come from their expense. PT. Muhtomas has left many Pure-Lead in the end of the year for the last 5 years. This is a prove that the company didn t maintain their inventory as efficient as it can. This left the company with a huge burden of costs that hurt the profit. To solve this problem, analyze the costs of the inventory in last 5 years is required to solve the main problem. By analyzing the costs, we will know the annual ordering costs and the annual holding costs that maybe the root of the problem of the company. Study by using economic order quantity and using continuous review policies is required to analysis of the issue. This method will give the company different view of the cost and can be used to compare data between the company in reality and the company that used these method. Determining the right quantity that should be ordered can give the company the minimum annual ordering cost and annual holding cost which the company can get. The data that produced by this study cases can be used to evaluate the problem of the company in the future. The result of this research give a solution which the company needed. For last 5 years, the company biggest costs come from the leftover and the annual inventory costs of the company s inventory. In order to reducing the inventory costs and leftover of pure-lead, the company should use continuous review policy to determine the level of safety stock and reorder level. By determining it, the company can safely protect their inventory from demand uncertain and satisfy the demand. The company should also use EOQ calculation to find the quantity ordered which give the company minimize cost. By finishing this reseach, analyzing the company demand for 2010 can be done and creating a strategy which is determining the safety stock, reorder point, EOQ for Keywords : Tin processing, EOQ, Continuous review policy iii

4 ANALYSIS OF INVENTORY COSTS IN PT. MUHTOMAS Mochamad Aditya Pratama Tanggal Sidang : 11 march 2010 Tanggal Lulus : 10 April 2010 Program Sarjana, Institut Teknologi Bandung Pembimbing : Dr. Mursyid Hasan Basri ABSTRAK Studi kasus ini dirancang untuk menganalisa masalah biaya yang terjadi di PT. Muhtomas. Perusahaan ini memproduksi timah kalsium sebagai produk akhir dari timah 99.9% yang juga disebut sebagai Pure-Leads. Perusahaan ini memiliki masalah dengan keuntungan perusahaan. Walaupun pendapatan perusahaan meningkat pada tahun 2007 dan 2008, perusahaan masih belum membuat keuntungan lebih besar dibandingkan dari lahun sebelumnya. Jadi, masalah sesungguhnya berasal dari pengeluaran perusahaan. PT. Muhtomas telah menyisakan Pure-Lead dalam jumlah besar di tiap akhir tahun selama 5 tahun terakhir. Ini membuktikan bahwa perusahaan tidak mengatur persediaan mereka seefisien mungkin. Hal ini meninggalkan perusahaan dengan biaya besar yang membebani keuntungan. Untuk mengatasi masalah ini, menganalisis biaya persediaan dalam 5 tahun terakhir diperlukan untuk memecahkan masalah utama. Jika analisis biaya dilakukan, biaya pemesanan tahunan (annual ordering cost) dan biaya menyimpan tahunan (annual holding cost) dapat diketahui. Studi dengan menggunakan Economic Order Quantity dan Continuous Review Policy diperlukan untuk menganalisa masalah. Metode ini memberikan perusahaan pandangan yang berbeda dari biaya dan dapat digunakan untuk membandingkan data antara perusahaan yang sebenarnya dan perusahaan yang menggunakan metode ini. Menentukan jumlah kuantitas yang tepat dapat memberikan biaya tahunan yang minimum pada annual ordering cost dan annual holding cost. Data yang dihasilkan dari studi kasus ini bisa digunakan untuk mengevaluasi problem daro perusahaan di masa depan. Hasil dari penelitian memberikan solusi yang dibutuhkan perusahaan. Selama 5 tahun terakhir, kerugian perusahaan berasal dari biaya inventory dan sisa inventory. untuk mengurangi biaya inventory dan sisa pure-lead, perusahaan harus menggunakan continuous review policy untuk menentukan level dari safety stock dan reorder level. Dengan menentukannya, perusahaan bisa dengan aman melindungi inventory dari demand yang tidak pasti dan memuaskan pelanggan. Perusahaan juga harus menggunakan kalkulasi EOQ untuk menemukan jumlah tepat yang diorder yang memberikan biaya yang minimum untuk perusahaan. Dengan menyelesaikan penelitian ini, analisa demand perusahaan untuk 2010 dapat dilakukan dan dapat dengan mudah membuat strategi untuk menentukan safety stock, reorder point, dan EOQ untuk Keywords : Pengolahan timah, EOQ, Continuous review policy iv

5 FOREWORD A very deep thank you to all parties who have directly and indirectly helped the writer in finishing this final paper, especially to: 1. Dr. Mursyid Hasan Basri, as a supervisor in finishing this final paper who had given me his precious time. 2. Mr. Togar Simatupang, as a lecturer on Supply Chain Management who had given the theoritical and practical lessons. 3. Mr.H. M. Imson, as the CEO of PT. Muhtomas, and Mr. Syamsuri, as the production manager, who had given me his precious times to do interviews and gave me some data that are essentials for the final paper.. 4. All Lecturers and staffs in SBM-ITB who had shared knowledge, especially who directly and indirectly help the me to finish this final paper. 5. All staff and employees in PT.Muhtomas, who had given me a lot of help and information to finish this final paper. 6. My beloved parents and family, who had given me a lot of support and suggestion in finishing this final paper. 7. My friends that keep me accompany until today in: Agga Diguci, Manggala Putra, Hasfi Sihite, Louis Philip, Etgar Rizky, Panji Alfi, Alesandra Usman, Anggara Pradhana, Fahmi Aulia, Nina Shanty, Adityawarman dwiputra, Hatta, and also for all SBM 2009 friends. 8. All parties which are hard to be stated one by one, for all the prayers, help and supports. Finally, the writer realizes that it not impossible that this final paper still has mistakes in the technical aspects or in the way the writer serves the final paper. Therefore, the writer is open for all comments, supportive-critical statement, and suggestion from the readers. Bandung, Maret 2010 M. Aditya Pratama v

6 LIST OF CONTENTS VALIDATION PAGE ii ABSTRACT iii ABSTRAK iv FOREWORD v LIST OF CONTENTS vi LIST OF TABLES viii LIST OF FIGURES ix LIST OF APPENDICES x CHAPTER 1 INTRODUCTION Problem Background Main Problem Problem Identification Scope of Problem Research Objectives Problem Boundaries Systematic of Writing 4 CHAPTER 2 THEORITICAL FOUNDATION Economic Order Quantity (EOQ) Total Cost Function Continuous Review Policy 8 CHAPTER 3 METHODOLOGY 11 CHAPTER 4 DATA ANALYSIS Formulation analysis Formulation inputs Applying continuous review policy Comparing the method with the situation in the company Creating plan for CHAPTER 5 CONCLUSION AND RECOMMENDATION Conclusion Recommendation 38 vi

7 REFERENCES 39 APPENDICES 41 vii

8 LIST OF TABLES Table 4.1 Yield of the process 15 Table 4.2 Average demand pure lead 15 Table 4.3 Unit cost per kg 16 Table 4.4 Standard deviation each year 18 Table 4.5 Average inventory during lead time, safety stock, and Reorder level 20 Table 4.6 Safety stocks worth week of supply 21 Table 4.7 Annual holding costs 21 Table 4.8 Quantity ordered 21 Table 4.9 Order-up-to level and expected inventory after order 22 Table 4.10 Average inventory level 23 Table 4.11 Compared average inventory level 24 Table 4.12 Average inventory level in Rupiah 25 Table 4.13 Inputs for real company 25 Table 4.14 Inventory costs of real company 26 Table 4.15 Inputs for company that use method 26 Table 4.16 Inventory cost for the real company 26 Table 4.17 Compared inventory costs 28 Table 4.18 Compared worth of leftover 29 Table 4.19 Safety stock for desired service level 33 Table 4.20 Safety stock for desired increase in STD 33 Table 4.21 Increase in EOQ based on AVG 34 Table 4.22 decrease in EOQ based on tin prices 34 viii

9 LIST OF FIGURES Figure 1.1 Calcium Tin s business process 2 Figure 2.1 Service level to z value illustration 9 Figure 4.1 Graph of compared inventory costs 27 ix

10 LIST OF APPENDICES Appendix 1 Real Company Process Raw Material Pure-Lead (99.9%) Liquefaction Process Finished Product 48 Appendix 2 Average demand of pure-lead 51 Appendix 3 Calculating standard deviation 54 Appendix 4 Tin prices based on London Metal Exchange 57 Appendix 5 Company s ordering process 58 x