Medicine and Consumer Goods Supply Management Design to

Reduce Stockout and Days of Inventory in PT. XYZ

Monica Linawati

Master of Management, Universitas Airlangga, Surabaya, Indonesia

Keywords: ABC Analysis, Stockout, Fishbone Diagram, Inventory Management, days of Inventory

Abstract: Stockout and overstock are the trigger factors for increased costs. Overstock will result in a waste in the cost

of savings and a high Days of Inventory (DOI), but if the inventory is low, there will be a potential loss of

opportunity for profit if the actual demand is greater than the estimated inventory and trigger customer

disappointment.This study was an observational (non experimental) study. Medicine and consumer goods

inventory management planning conducted ABC analysis to find out the products that become classes A, B,

and C. Class A products are forecasted using exponential smoothing method for product needs in 2019 and

calculated EOQ and ROP. Interviews were conducted with informants regarding the current inventory

management system. The root cause of the stockout is analyzed using fishbone diagrams. From the results

of fishbone analysis and interviews that have been carried out on informants, it is known that: 1) lack of

communication with marketing; 2) making stock estimates is not according to needs; 3) no planned sales

average; and 4) there is no coordination between the planner, marketing, and warehouse.

1 INTRODUCTION

Good planning needs to be done so that the

inventory level has maximum benefits. Overstock

requires large funding, and conversely the stockout

can have a consequence on customer disappointment

with the company which can have an impact on

customer loss and a decrease in company revenue.

At present competition takes place not only

between companies, but also competition between

supply chains. The company does not only compete

in products and services, but corporate competition

already involves competition in acquiring material

goods from suppliers, competition in obtaining

resources and services in transportation,

warehousing, and finished goods distribution

systems that can reach customer or market access as

wide as broad.

Key activities in SCM include: mapping of

customer needs and unmet demand to determine

sales and production forecasting, fulfilling sales

orders, vendor management, warehousing and

inventory, managing transportation and distribution,

managing accounts payable and receivable, and

managing cash inflows and outflows (Jacobs &

Chase, 2018).

Inventory management is a branch of business

management that focuses on planning and

controlling inventory, which is a critical issue of

logistics management for most companies, both

large, medium and small companies. Logistics is all

about managing inventory, whether moving or

stationary in the warehouse, in the form of finished

products or raw materials. The Bill of Rights from

logistics is "Sending the right product to the right

place, at the right time, the right number and

conditions, and at the right cost (Goldsby &

Martichenko, 2005). Therefore, effective inventory

management is needed to make that happen.

The challenge in managing inventories is to

balance supply and demand. PT. XYZ is a

distributor in Sidoarjo that distributes medicine and

consumer goods. The company has difficulty

adjusting supply to customer demand efficiently,

where there is a high stockout and Days of Inventory

(DOI) in the business. Every time there is a stockout,

then an additional order is submitted, and a long

DOI item will remain in the warehouse until there is

a sales request, there are even products that have

never been sold until they wait to expire to be

730

Linawati, M.

Medicine and Consumer Goods Supply Management Design to Reduce Stockout and Days of Inventory in PT. XYZ.

DOI: 10.5220/0009502907300735

In Proceedings of the 1st Unimed International Conference on Economics Education and Social Science (UNICEES 2018), pages 730-735

ISBN: 978-989-758-432-9

returned to the center. Figure 1 shows the number of

additional orders at PT. XYZ to suppliers.

Figure 1: Additional Orders from 2015 to May 2018

Additional order requests from the data above

are not always fulfilled, so that the stockout event

still occurs and ends in the occurrence of potential

shortages in the company, one of which is the non-

fulfillment of Purchase Order. This can have a

negative impact on the company, where there are

many complaints because the amount of empty stock

does not fit the needs, and can result in the loss of

sales sales due to customer disappointment. The data

in table 1.1 shows the number of Purchase Orders

that are not met every month at PT. XYZ from 2016

to November 2018.

Table 1: Number of Purchase Order Not Fulfilled.

Month

Year

2016

2017

2018

January

627

166

February

689

203

March

685

196

April

555

264

May

438

222

June

282

197

146

July

551

227

253

August

745

275

168

September

706

358

248

October

783

243

217

November

837

185

157

December

607

232

Based on the background above, the problem in

this study is to evaluate the current inventory

management system and explore the root causes of

the large number of stockouts and high Days of

Inventory based on fishbone diagram, and design an

optimal inventory management system based on

Economic Order Quantity (EOQ) method and ABC

classification at PT. XYZ.

2 METHODOLOGY

This research was conducted in the logistics

department of PT. XYZ in November-December

2018. This study is observational research (non

experimental) by analysis root cause of stockout and

high Days of Inventory using fishbone diagram and

interview to informant, ABC analysis, and

forecasting class A results of ABC analysis.

In-depth interviews were conducted to strengthen

the results of the analysis and dig deeper into the

causes of the large number of stockouts and high

Days of Inventory assisted by fishbone diagrams.

Fishbone diagrams are used to trace the causes so

that they can be expected as managerial aspects and

suggestions to the management of PT. XYZ.

ABC classification divides inventory items into

three groups: high value volumes (A), moderate

volume values (B), and low value volumes (C), with

volume value categories mapped into strategies that

are appropriate for that category. The purpose of

ABC classification is to try to separate the important

from the unimportant, and to establish the

appropriate level of control over each item.

Unit of analysis that will be examined in this

study are sales data, warehouse and corporate

purchasing department. The unit of analysis of a

study can be in the form of individuals, groups,

organizations, objects, regions and certain times in

accordance with the focus of the problem (Kothari,

2004).

The research design used in this study is

descriptive, explaining how the phenomenon of

problems faced in inventory management at PT.

XYZ to be able to answer research questions, and

then provide a design solution.

The data sources used in this study come from

primary data and secondary data. Primary data is

data from the process of observation and direct

interview with the Finance Supervisor and

Marketing Supervisor. Interview questions use a list

of questions assisted with recording devices as

documentation. The search for the high number of

stockouts and Days of Inventory is done using

fishbone diagrams. Secondary data is obtained from

the supporting document study process at PT. XYZ.

3 RESULT AND DISCUSSION

3.1 Fishbone Analysis

Fishbone analysis is a great tool to go inside and

finding out the root cause of stockout. Based on the

results of observations and interviews, fishbone

analysis are shown in figure 1.

Medicine and Consumer Goods Supply Management Design to Reduce Stockout and Days of Inventory in PT. XYZ

731

Figure 1: Fishbone analysis

In this research, the main problems of PT. XYZ

is a high stockout and Days of Inventory. Overstock

requires large funding, and conversely the stockout

can have a consequence on customer disappointment

with the company which can have an impact on

customer loss and a decrease in company revenue.

PT. XYZ is a pharmaceutical distributor, with

supply chain services consisting of inventory

management, ordering, inventory storage, shipping,

order acceptance, information systems, and all other

processes so that activities can run smoothly. Second

fishbone analysis alongside the Why-Why analysis

will reveal the reasons.

3.1.1 System Problems

Having a computerized system and using it properly

is one of the supporting factors in the inventory

management system. PT. XYZ revealed that one of

the causes of goods vacancies was due to the

unavailability of a system for inventory control, so it

was still manual by conducting one-on-one checks

by the personnel on duty. Another reason is to

upgrade to a more call system that requires high

costs, therefore PT. XYZ has not been able to catch

up in the technology field and lags behind in

competition with other distributors.

3.1.2 Process Problems

The process of inventory management management

of PT. XYZ revealed a number of problems, namely

because of the large amount of inventory that must

be managed, but done manually causing frequent

stockouts and overstocks. Estimated stock

requirements are made more than demand and vice

versa, this is due to the absence of sales plans. Poor

execution of this process also stems from causes

such as the wrong ordering system and high costs.

PT. XYZ also has many suppliers and high lead

times, which can also worsen the frequent

occurrence of stockout cases.

3.1.3 Procedure Problems

Every company must have a procedure in carrying

out an activity so that it runs correctly and

accordingly. Ordering procedure at PT. XYZ must

be done through the Center distribution of PT. XYZ

first, so that the lead time becomes longer, because

there are several factories whose locations are the

same as PT. XYZ, but must be sent to the Center of

PT. XYZ first in Jakarta. There are also many

routine allocations every month from the distribution

center, and this affects the amount of inventory.

If the current stock is low, but the demand is

greater then it creates additional orders, and impacts

on the vacuum of goods, and vice versa, if the

current stock is still sufficient due to small demand,

but coupled with routine allocations, the stock will

accumulate and make days of inventory long.

PT. XYZ also has a routine activity called

'closing day', which is the pursuit of turnover so that

it can be reached, every end date of the month,

before changing tomorrow (already changing

months). The phenomenon that is often faced is to

close the turnover, suddenly there is a surge in

demand, where the existing stock is insufficient, so

there is a 'goib' item, where the stock can increase

first, but new items will be sent that day.

3.1.4 Human Resource Problems

Human resources must be well motivated and

directed according to the company's vision and

mission. Human resources at PT. XYZ is enough for

now, but the lack of skills in inventory management

is something that has a negative impact on the

company's process flow. The company is still

manual in checking the stock so that more time is

needed in reviewing the number of available stocks.

The lack of time to review this stock is also one

of the obstacles. In determining the estimation of

stock requirements based on information from

informants, there is no coordination and

communication between the planner, warehouse, and

marketing. The planner also has no reciprocal

relationship with the supplier, so he does not know

whether the order that has been made has been

received, the stock at the supplier is there/ not, and

whether it has been sent/ not. After the goods

vacuum occurs, then PT. XYZ pursues suppliers.

3.1.5 Product Problems and Prices

Based on information from informants, so far the

inventory management system at PT. XYZ has never

UNICEES 2018 - Unimed International Conference on Economics Education and Social Science

732

been classified based on ABC analysis. The budget

allocation for drug supplies is not too calculated, so

there is a lot of empty stock and then making

additional orders, which can actually increase the

cost for the company. The existence of a 'retail last

bite' program also sometimes causes the number of

orders to jump suddenly to suppliers and causes

excess stock and warehouse capacity to overload /

insufficient.

3.2 Solutions From Fishbone Analysis

There are several reasons of stockout in PT. XYZ.

Here are some solutions to help PT. XYZ for

improving their supply management.

3.2.1 Solution to System Problems

To overcome system problems, PT. XYZ can

upgrade the system so that it has a program as a

'reminder' of what stock is left, and when is the right

time to reorder. So the system does not only function

as a note taker and see what the final stock is, then it

is checked manually, but it can also be used as a

reminder of the remaining existing stock. The

electronic system will be able to solve the problem

of shortages and excess stock, and also the wrong

ordering process.

3.2.2 Solution to Process Problems

To reduce and resolve process problems, PT. XYZ

can supply contracts with suppliers, so there are

clear agreement terms and commitments that must

be fulfilled between PT. XYZ and suppliers. The

supply of the contract can determine the lead time

agreement that must be maintained, so that long lead

time problems can be prevented by ordering earlier.

With an earlier booking, the stock will arrive on

time and there will be no stockout and backordering.

Backordering can trigger customer disappointment

and potential loss of sales / sales.

Estimates of fewer stock requirements than

demand can be prevented by coordinating in

advance between warehouses, marketing, and

planning, so that better forecast results are obtained,

not just on intuition. Another method that can be

used is using the forecast method selection that is in

accordance with the pattern of PT. XYZ.

3.2.3 Solution to the Procedure Problem

Procedure problems are the main key

problem in management. The wrong initial

procedure will make the whole series not smooth,

and need to be resolved immediately. The procedure

where the goods must go through the central

distributor first, even though it should be closer if

from the factory directly to PT. XYZ should only be

done administratively, so that the achievement of

lead time is shorter and the cost estimation is lower,

because there does not have to be a factory cost to

the central distributor PT. XYZ first, then the

Distribution Center sends to PT. XYZ. Also, there is

no safety stock at PT. XYZ. So when the stock is out

of stock, then planner make an additional orders, so

in this study provides a design of inventory

management for the management of PT. XYZ for

optimal inventory.

3.2.4 Solution to Human Resource Problems

Human resource is the blood of business life

and it is very important to motivate and maintain it

so they are on the right track. To solve employee

problems, PT. XYZ can conduct comprehensive

training in the right way. Good comunication and

coordination between the marketing, warehouse, and

purchasing also need to be done to determine about

each other's responsibilities. Every time planner will

make a purchase plan there should be good

communication and coordination so that there is a

clear estimation of sales requirements in the amount

and how much stock is currently in the warehouse.

3.2.5 Solution to Product Problems and Prices

Based on information from informants, PT.

XYZ has never done inventory classification based

on ABC analysis. ABC analysis can be used to

classify which products are more important and have

a greater investment value so that they do not sit

quietly in a warehouse and make a high Days of

Inventory.

PT. XYZ also has many products that check it

manually, so that proper forecasting is needed so

that stockouts don't occur frequently. Better

forecasting means lower safety stocks and higher

levels of availability. It also means a reduced

exposure to excess and obsolete stock risk (a large

contributor to holding cost of stock).

3.2.6 Solution to Supplier Problems

PT. XYZ there should be a supply contract with the

supplier, so that there are clear agreements regarding

lead time, supplier response, and other agreements.

A close relationship with supplier is crucial. When

supplier lead times are reduced below the required

lead time, it’ll help remove the requirement to hold

Medicine and Consumer Goods Supply Management Design to Reduce Stockout and Days of Inventory in PT. XYZ

733

much stock, especially consumables. Cutting lead

times in half will reduce safety stocks by about 30%

for the same availability.

Unreliable supply is one of the reasons for

holding safety stocks. If delivery is guaranteed on

the due date then safety stock can be reduced what's

needed to cover common-cause variability. A good

start is sharing demand, forecast and stock positions

with suppliers. When there’s heightened

transparency of information throughout the supply

chain it’ll improve reliability and mitigate

Bullwhip/Forrester effects.

3.3 Inventory Level as an Effort To Minimize

Stockout

In minimizing stockout cases, we need control over

demand. the control applied by the company is to

use inventory level. Inventory level is a safety stock

that must be on that day to anticipate a surge in

demand the next day. Inventory or level stock is

used as an effort to anticipate high demand so

companies don't have to worry about shortages of

stock.

The stock level for suppliers is needed as an

effort to optimize the order purchase costs related to

minimum orders applied by suppliers.

Considerations in installing stock levels to suppliers

include lead time, condition of goods, quality, and

others.

3.4 Inventory Optimization Using ABC Analysis

The researcher obtained data on the recording of

demand and purchase prices in the period January-

November 2018 totaling 469 products. A total of

469 products are grouped based on ABC analysis of

investment value. According to the results of the

interview, PT. XYZ has never done ABC analysis to

help in product inventory management systems.

Drug products and consumer goods are grouped

based on the cumulative percentage of investment

value. Products with a cumulative percentage of up

to 70% are group A, 70-90% are group B, and 90-

100% are group C.

Table 2: Result of ABC Analysis

Class

Investment

Perce

Total

Perce

Amount (IDR)

ntage

Produ

ntage

31,483,513,143.00

70,4%

10,9%

8,751,119,247.00

19,6%

16,6%

4,467,926,887.00

10,0%

72,5%

Total

44,702,559,277.00

100%

From the calculation of ABC analysis, the value

of investment is obtained by the results of group A

with an investment amounting to 70.4% of the total

investment consisting of 51 products which is equal

to 10.9% of the total product. Group B investment

amounted to 19.6% of the total investment and

consisted of 78 products which amounted to 16.6%

of the total product. Group C with a minimum

investment of 10.0% of the total investment,

consisting of 340 medicinal products and consumer

goods, which amounted to 72.5% of total products.

3.5 Dynamic Inventory Approach To Minimize

Days on Inventory

High Days of Inventory is a result of overstock that

cannot be controlled and a waste with a considerable

amount of expenditure. Until now, eliminating the

risk of overstock up to 100% is not possible, given

the fluctuating customer demand can cause the

Purchase Order issued by the customer to be much

smaller than the forecasting that the company had

previously done.

For close suppliers, companies are still easier to

make delays or order cancellations. different from

outside island suppliers, considering the lead time is

very long, which is one to two weeks, so the goods

still come to the company without further processing

due to the absence of requests again. based on this,

the risk of a stockout will always be there and

difficult to eliminate.

After conducting an analysis to find the root

cause of the case of high stockout and Days of

Inventory, then a proposed improvement is

formulated which can be an alternative action that

can be taken in reducing the occurrence of this

stockout case. Approach to dynamic inventory by

considering uncertainty in demand can be

considered to be applied in minimizing high

stockouts and Days of Inventory.

This policy is characterized by the parameters of

the reorder point and number of orders. The ordering

point is the same as the total forecasting and the

maximum number of forecasting uncertainties

during the + 1 period lead time for a service level

cycle target. While the safety stock equals the

maximum number of forecasting uncertainties

during the protection interval. The point of reorder

and the number of orders can be determined by the

following equation:

EOQ =

√

2 (%

ℎ

/100 )

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734

3.6 Limit Analysis

This study is limited to internal logistics inventory

management PT. XYZ in November - December

2018, does not reach the external supply chain

network. Research focus on the categories of all

products distributed. Historical data used is in the

period January to November 2018.

4 CONCLUSIONS

Stockout is never a pleasant incident for the

company, it is even less so for those responsible for

it. Retailer company as PT. XYZ suffer huge losses

every year because of empty shelves and potency of

disappointed customers. Damaged reputation and

customer loyalty, decreased impact of promotions,

and higher costs for re-ordering all again.

The fishbone diagram and analysis was very

innovative and efficient way of resolving key issues

of the organizations. This research reveals that the

root causes of frequent stockouts at PT. XYZ is (1)

lack of communication and coordination between

planner, marketing, and warehouse, (2) no sales

plan, and (3) estimation of stock requirements that

are less than demand and vice versa (planning does

not match reality) .

This research also provides some solutions for

resolving those problems. If PT. XYZ can apply

supply management design and undertake those they

can get rid of the ongoing problems of stockout and

strive forward for optimal inventory level.

REFERENCES

Goldsby, Dr. Thomas, Robert Martichenko. (2005). Lean

Six Sigma Logistics Strategic Development to

Operational Success. USA: J. Ross Publishing, Inc.

Jacobs, Robert F & Richard B. Chase. (2018). Operations

and Supply Chain Management fifteenth edition.

New York: McGraw Hill Education International

Edition.

Kothari, C.R. (2004). Research Methodology, Methods

and Techniques, Second Revised Edition. New

Delhi: New Age International Publishers.

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