Volume 9, Issue 7, July – 2024 International Journal of Innovative Science and Research Technology

ISSN No:-2456-2165 https://doi.org/10.38124/ijisrt/IJISRT24JUL654

Optimization of Raw Material Inventory using

Always Better Control (ABC) Analysis and
Economic Order Quantity (EOQ) Method
Approach in the Warehouse of a Bolt
Manufacturing Factory in Indonesia
Amalia Khusnul Irfani1 Supriyanto2 Gigih Hapsak Pradipto3
Industrial Engineering, Industrial Engineering, Industrial Engineering,
Faculty of Engineering Faculty of Engineering Faculty of Engineering
Pelita Bangsa University Pelita Bangsa University Pelita Bangsa University
Cikarang, Indonesia Cikarang, Indonesia Cikarang, Indonesia

Abstract:- There is a problem in the raw material I. INTRODUCTION

procurement process at the Contractor Company, such
as running out and excess stock of raw materials, as well To make a product, raw materials are needed which are
as difficulties in determining how many raw materials to processed into finished materials through the production
order that meet the company's economic value. Running process. Raw materials have a very important role in the
out of raw material stock results in delays in production company, because if there are no raw materials then
activities, while excess raw material stock can fill production activities will not run. According to Sasongko et
warehouse capacity, thereby increasing storage costs. To al (2016:224) inventory is goods available for resale in
overcome this problem, research was carried out using a buying and selling transaction activities, or equipment
quantitative descriptive method to determine the level of needed for the production process. In business, inventory is
production cost efficiency and production effectiveness generally considered a company asset that can generate
level in order to achieve optimization of raw material income within a certain period of time. Meanwhile, the
supplies using Always Better Control (ABC) Analysis definition of raw material inventory according to Heizer and
and the Economic Order Quantity (EOQ) Method at Render (2010) in research, raw material inventory is one of
Bolt Companies. ABC analysis plays a role in the company's most expensive assets, representing as much
determining which raw materials have the highest level as 50 percent of all invested capital. On the other hand, a
of demand and the EOQ method plays a role in company can reduce costs by reducing inventory [1].
determining the amount of raw materials to be ordered Therefore, proper inventory control is needed to achieve
in order to meet the company's economic value. The optimum raw material supplies.
research results show that the combination of ABC
Analysis and EOQ Method can reduce ordering costs As experienced by one of the bolt production
and raw material inventory. There are 4 items out of 10 companies in Cikarang, there were problems in the raw
raw material items that are included in Category A or material procurement process, such as running out and
the most prioritized category. From the results of excess stock of raw materials, as well as difficulties in
calculations using the EOQ method, the Bolt Company determining how many raw materials to order that met the
can save total orders and raw material inventory (TIC) company's economic value. Running out of raw material
in the period January to December 2023 amounting to stock results in delays in production activities, while excess
IDR 2,147,403,-. raw material stock can fill warehouse capacity, thereby
increasing storage costs. The company needs a solution to
Keywords:- Optimization of Raw Material Inventory, achieve the expected goals, such as having a credible value
Always Better Control (ABC) Analysis, Economic Order reference so that it can determine how many raw materials
Quantity (EOQ) Method. should be ordered and determine which raw materials have a
high level of demand so that it can anticipate fluctuations in
raw materials so that they must be prioritized first. To
overcome this problem, an ABC analysis test will be carried
out to find out which raw materials are most needed from
highest to lowest and the EOQ (Economical Order Quantity)
method to determine the amount of raw materials to be
ordered at the lowest cost.

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Volume 9, Issue 7, July – 2024 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165 https://doi.org/10.38124/ijisrt/IJISRT24JUL654

II. LITERATURE STUDY precisely, and will not create excess inventory which can
result in inefficient use of funds [3].
A. Raw Material Inventory
Inventory is a resource that is temporarily idle waiting C. Analisis Always Better Control (ABC)
for further processing [1]. With inventory planning, ABC analysis is an inventory control technique by
companies can fulfill buyer orders quickly and precisely, and paying attention to groups of goods according to the level of
will not create excess inventory which can result in importance of each group of goods. According to Render
inefficient use of funds (Darmawan et al., 2015) in research and Heizer (2005:62) ABC analysis divides inventory into
by [8]. three groups based on annual volume in money. In ABC
Analysis, goods are usually grouped into three classes,
 Various Types of Raw Material Supplies namely A, B, and C. Class A is a very important group of
The following will explain more about these types of goods (the largest sales value), class B is a group of goods
supplies: with medium sales value, and class C is a group goods with
the smallest sales value [4]. Based on the Pareto principle,
 Raw Materials Inventory goods can be classified into 3 categories as follows:
This is a raw material that has not yet entered the
production process.  Category A
These are inventories that have a high annual volume
 Work in process (WIP) value in rupiah. Category A represents around 60% – 80%
These are raw materials that have undergone a of inventory costs.
production process but are still not perfect or have not yet
become a finished product.  Category B
It is an inventory with a medium annual volume value
 Maintenance Repair Operating (MRO) in rupiah. Category B represents 25% – 35% of inventory
Maintenance Repair Operating or operational repair costs.
maintenance is a type of inventory that is needed in case
there is machine damage during the production process that  Category C
must be scheduled or anticipated. This is inventory with a low annual rupiah volume
value, which only represents around 5% – 15% of inventory
 Finished Goods Inventory costs [5].
Namely the finished product and ready to be sold or
sent to customers [2]. D. Economic Order Quantity (EOQ) Method
Economic Order Quantity (EOQ) is the quantity of
 Factors Affecting Raw Material Supplies purchase orders for replenishment that minimizes total
According to Suyadi Prawirosentono (2001:71) in inventory costs [5]. Meanwhile, according to [6] Economic
research by [7] the factors that influence the amount of Order Quantity (EOQ) is the number of units of goods that
inventory are: must be ordered every time an order is placed so that the
costs associated with procuring inventory are minimal, or
 Estimating the use of raw materials is determining the the most optimal number of purchasing units. The EOQ
amount of raw material inventory required which must be method not only determines the optimal order quantity but
in accordance with needs for a certain period. more importantly concerns the financial aspects of decisions
 Raw material prices are prices that can influence the about the order quantity [9]. The calculation of the
amount of inventory that must be held. Economic Order Quantity (EOQ) method according to [5] is
as follows:
 Inventory costs are ordering costs and warehouse
material storage costs.
The formula for economic order quantity (EOQ) is:
 Waiting time for orders (lead time) is the time period
from when an order is placed until the order becomes
2DS
stock in the warehouse. EOQ = √
H

B. Controlling Raw Material Inventory

Raw material inventory control is an activity to Where:
determine inventory levels, purchase times and the amount of
inventory that must be provided (Herjanto 2015). Controlling EOQ : Economic quantity of goods per order.
raw material inventory aims to make inventory costs
efficient, one way is to make appropriate purchases D : Annual demand in units for inventory items.
according to the production plan so that there are no
shortages or excesses in raw material inventory (Renta et al S : Ordering costs for each order.
2013). According to Nasution (2008) Inventories are idle
resources waiting for further processing. With inventory H : Storage costs per unit.
planning, companies can fulfill buyer orders quickly and

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Volume 9, Issue 7, July – 2024 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165 https://doi.org/10.38124/ijisrt/IJISRT24JUL654

Next, by using the formula above you can find the Good (NG), return of raw materials, stock taking of raw
number of orders (P) during a certain period, namely with materials, etc.
the formula:
IV. RESULTS AND DISCUSSION
D
P=
EOQ
In this research, we only tested several types of tool raw
materials for optimization using predetermined methods. The
Where: following is a calculation of the costs incurred by the
company:
P : Frequency of orders per year.
A. Storage Costs
D : The number of requests in a certain period. Costs arising from storing raw material inventory in a
storage room for a certain period of time. Storage costs borne
EOQ : Economic quantity of goods per order. by Bolt Company include:
The formula for determining the TIC value is:  Electricity Costs
D Q
Costs incurred by companies using electricity while raw
TIC = (Q S) +( 2 H) materials are stored in the warehouse. Calculations are
obtained from the use of 5 lamps in the warehouse with a
Where: power of 5 watts, a ½ PK AC with a power of 650 watts with
a run time of 8 hours per day, and a special computer for
TIC : Total inventory cost. Tools raw materials with a power of 120 watts with a run
time of 8 hours per day multiplied by 25 working days. The
Q : average purchase of raw materials. calculation is as follows:

D : Annual demand in units for inventory items.  Lamps = 5 lamps x 5 watts x 8 hours = 200 watts
 AC ½ PK = 650 watts x 8 hours = 5,200 watts
S : Ordering costs for each order.  Computer = 120 watts x 8 hours = 960 watts
Total = 6,360 watts
H : Storage costs per unit. = 6.36 kWh

III. RESEARCH METHODS Because the company has electricity tariff group B-2, it
is charged IDR 1,444.70 per kWh. So, the calculation of
This type of research is quantitative descriptive research electricity costs becomes:
which can be used to collect, analyze and describe data
related to raw material supplies to achieve optimal decision Electricity costs per day = 6.36 x IDR 1,444.70
making goals. Quantitative descriptive research is research = IDR 9,188,292 per day
that only describes the content of a variable in the research,
not intended to test a particular hypothesis. Thus it can be Electricity costs per month = 25 x IDR 9,188,292
seen that quantitative descriptive research is research that = IDR 229,707.3
describes, examines and explains a phenomenon with data = IDR 230,000 per month
(numbers) as is without the intention of testing a particular
hypothesis [10]. In this research, a quantitative descriptive Electricity costs per year = 12 x IDR 230,000
method was used to determine the level of production cost =IDR 2,760,000 per year
efficiency and production effectiveness level using Always
Better Control (ABC) Analysis and the Economic Order  Labor Costs
Quantity (EOQ) Method at Bolt Companies. Costs incurred by the company to provide wages to
employees who work in the warehouse, who are tasked with
The data collection methods used are primary data and maintaining and organizing goods, maintaining warehouse
secondary data. Primary data is information obtained from cleanliness, and inputting raw material data for tools into the
primary sources, namely information from sources [11]. The company's ERP system. The following is the cost calculation
primary data in this research is information about current for 1 warehouse worker with a monthly salary of IDR
inventory management practices, the challenges faced, and 4,800,000:
the solutions needed to overcome these challenges.
Meanwhile, secondary data is information obtained not Salary for 1 worker = 12 x IDR 4,800,000
directly from sources but from third parties [11]. Secondary = IDR 57,600,000 per year
data in this research is data in the form of Microsoft Excel or
a database containing data regarding raw material supplies, So, the total storage costs incurred by the Bolt
where the secondary data source comes from the company's Company which includes electricity costs and labor costs are
Enterprise Resource Planning (ERP) System, where in this IDR 2,760,000 per year + IDR 57,600,000 per year = IDR
system the author obtains raw material data entry, exit, Not 60,360,000 per year.

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ISSN No:-2456-2165 https://doi.org/10.38124/ijisrt/IJISRT24JUL654

B. Order Costs  Communication Costs

Costs incurred by the company to order raw materials Costs incurred by the company for the use of
from the Supplier. Ordering costs that must be incurred by communication services in carrying out raw material buying
the Bolt Company include: and selling transactions. Communication can be via E-mail,
WhatsApp, and Telephone via cellphone using the company
WiFi network. The following is a breakdown of company
WiFi costs within 1 year:

Table 1 Details of Bolt Company Wifi Costs in 2023

Month Wifi Voucher Costs
January IDR 50,000
February IDR 50,000
March IDR 50,000
April IDR 50,000
May IDR 50,000
June IDR 50,000
July IDR 50,000
August IDR 50,000
September IDR 50,000
October IDR 50,000
November IDR 50,000
December IDR 50,000
Total IDR 600,000
Source: Bolt Company (2023)

 Administration Costs
Costs incurred by the company as operational costs during the process of buying and selling raw materials with suppliers,
which are indirect costs for the smooth running of business operations. The following are details of company administration costs
within 1 year:

Table 2 Details of Bolt Company Administration Costs for 2023

Month Administration Costs
January IDR 50,000
February IDR 20,000
March IDR 35,000
April IDR 28,000
May IDR 25,000
June IDR 12,000
July IDR 16,000
August IDR 24,000
September IDR 22,000
October IDR 15,000
November IDR 32,000
December IDR 31,000
Total IDR 310,000
Source: Bolt Company (2023)

So, the total ordering costs incurred by the Bolt = IDR 75,833.33 = IDR 76,000
Company which includes communication costs and
administration costs are IDR 600,000 per year + IDR D. Storage Costs per Unit of Raw Material (H)
310,000 per year = IDR 910,000 per year.
𝑇𝑜𝑡𝑎𝑙 𝑠𝑡𝑜𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡𝑠
H =
C. Ordering Costs Each Time Order (S) 𝑇𝑜𝑡𝑎𝑙 𝑒𝑥𝑐𝑒𝑠𝑠 𝑟𝑎𝑤 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠

𝐼𝐷𝑅 60,360,000
Total order cost =
S = 13.700
Frequency of orders

𝐼𝐷𝑅 910,000 = IDR 4.405,84 = IDR 4.406

=
12

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Volume 9, Issue 7, July – 2024 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165 https://doi.org/10.38124/ijisrt/IJISRT24JUL654

E. Always Better Control (ABC) Analysis Calculations

ABC analysis plays a role in determining the priority level of each raw material by grouping it into 3 categories, namely A,
B, and C. The following is data on 10 types of tools along with prices/pcs, demand or needs within a year, along with the total
price spent.

Table 3 Data on Raw Material Needs for Bolt Company Tools for the Period January 2023 – December 2023

Source: Bolt Company (2023)

The following is Table 4 which is the result of ABC analysis calculations with 10 types of Tools raw materials, where
Category A has a cumulative value of ≤ 70%, Category B has a cumulative value of ≥ 70% ≤ 95%, and Category C has a
cumulative value of ≥ 95%. Because ABC Analysis aims to find priority raw materials, in the subsequent EOQ Method
calculation process it only focuses on Category A.

Table 4 Data Result of ABC Analysis of Bolt Company Tools Raw Materials for the Period January 2023 – December 2023

Based on the table above, the following is an example After the percentage has been calculated, the next step
of calculations to determine Categories A, B and C using is to sort the percentage values from largest to smallest, then
ABC Analysis: determine categories A, B, and C. After that determine the
Cumulative % value, with the first row formula having the
Item = HR ROUND PL.S-1K3006 same value as the percentage, then in the next row use
formula previous Cumulative % + Percentage on calculated
Demand = 20,400 Pcs row.

Price / Pcs = IDR 3,700 F. Calculation of the Economic Order Quantity (EOQ)
Method
Total Price = IDR 75,480,000 The EOQ method plays a role in determining the
company's economic value for each type of raw material so
Total Price IDR 75,480,000 that inventory is as minimal as possible. The following is
Percentage = Total All Price x 100
= IDR 340,280,000 𝑥 100
=
Table 5 which is data from the calculation results of the
22.18% EOQ Method.

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Table 5 Data from Calculation Results of the EOQ Method for Raw Materials for Bolt Company Tools for the Period January
2023 – December 2023

Based on the table above, the following is the EOQ 2SD 2 x 76,000 x 15,000
Method calculation to obtain the EOQ value of raw materials EOQ 4 = √ H
=√ 4,406
and the frequency of ordering raw materials. 2,280,000,000
=√ 4,406
2SD 2 x 76,000 x 20,400
EOQ 1 = √ =√ = √517,476.17 = 719.35 = 719 pcs
H 4,406
3,100,800,000 D 20,400
=√ P1= = = 24.31 = 24 times
4,406 EOQ 839

= √703,767.589 = 838.90 = 839 pcs D 11,000

P 2 = EOQ = = 17.86 = 18 times
616
2SD 2 x 76,000 x 11,000
EOQ 2 = √ =√ D 12,500
H 4,406
P 3 = EOQ = = 19.02 = 19 times
657
1,672,000,000
=√
4,406 D 15,000
P4= = = 20.86 = 21 times
= √379,482.52 = 616.02 = 616 pcs EOQ 719

2SD 2 x 76,000 x 12,500

G. Calculation of Total Inventory Cost (TIC)
EOQ 3 = √ =√ Total Inventory Cost (TIC) plays a role in finding the
H 4,406
total value of ordering costs and total storage costs for raw
1,900,000,000
=√ materials per year. If the amount of raw material inventory
4,406
stored in the warehouse increases, the storage costs will
= √431,230.14 = 656.68 = 657 pcs increase. Likewise, if the order frequency becomes greater,
the ordering and storage costs will also increase.

Table 6 Data from Calculation Results of the EOQ Method for Raw Materials for Bolt Company Tools for the Period January
2023 – December 2023

Based on the table above, Demand (D) is obtained Year (P). Then EOQ (Q*) is obtained from the EOQ
from the total demand for raw materials at the Bolt calculation. The following is a description of the Total
Company in the period January to December 2023. Average Inventory Cost (TIC) calculation before and after using the
Orders for Raw Materials (Q) are obtained from dividing EOQ Method:
Demand (D) by the Frequency of Number of Orders per

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 Before Using the EOQ Method: TIC 2

D
= ( S) +( H)
Q
Q 2
D Q
TIC 1 = (Q S) +( 2 H) 11,000 616
=( 616
76,000) +( 2
4,406)
20,400 1,667
= ( 1,667 76,000) +( 2
4,406) = (1,357,142.86) +(1,357,048)

= (930,053.98) +(3,672,401) = IDR 2,714,190.86

= IDR 4,602,454.98 = IDR 2,714,191

= IDR 4,602,455 D Q
TIC 3 = (Q S) +( 2 H)
D Q
TIC 2 = (Q S) +( 2 H) 12,500 657
=( 657
76,000) +( 2
4,406)
11,000 833
=( 833
76,000) +( 2
4,406) = (1,445,966.51) +(1,447,371)

= (1,003,601.44) +(1,835,099) = IDR 2,893,337.51

= IDR 2,838,700.44 = IDR 2,893,338

= IDR 2,838,700 D Q
TIC 4 = (Q S) +( 2 H)
D Q
TIC 3 = (Q S) +( 2 H) 15,000 719
=( 76,000) +( 4,406)
719 2
12,500 1,250
=( 76,000) +( 4,406) = (1,585,535.47) +(1,583,957)
1,250 2

= (760,000) +(2,753,750) = IDR 3,169,492.47

= IDR 3,513,750 = IDR 3,169,492

D Q So, it can be concluded that the number of orders for

TIC 4 = (Q S) +( 2 H)
raw materials and the frequency of orders before and after
being calculated using the EOQ method have different
15,000 1,250
= ( 1,250 76,000) +( 2
4,406) values. The HR ROUND PL.S-1K3006 item before
calculating using the EOQ method has an order value of
= (912,000) +(2,753,750) 1,667 pcs with an order frequency of 12 times in 1 year, so
the Total Inventory Cost (TIC) incurred by the Bolt
= IDR 3,665,750 Company is IDR 4,602,455.-. Then, after carrying out
calculations using the EOQ method, the number of orders
 After Using the EOQ Method: for raw materials became 839 pcs with an order frequency
of 24 times in 1 year, so that the Total Inventory Cost (TIC)
D Q incurred by the Bolt Company was IDR 3,696,231,-. So the
TIC 1 = (Q S) +( 2 H) Bolt Company can save inventory costs for the HR ROUND
PL.S-1K3006 item amounting to IDR 906,224 per year, as
20,400 839 well as for other items.
=( 839
76,000) +( 2
4,406)
V. CONCLUSIONS
= (1,847,914.18) +(1,848,317)
 Based on the results of the research that has been
= IDR 3,696,231.18 carried out, it can be concluded that:

= IDR 3,696,231  From the results of calculations using ABC Analysis, the
cumulative value of 10 items of Tools raw materials is
obtained which can be seen in Table 7 below.

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Table 7 Results of Cumulative Value Calculation in ABC Analysis

No Item % Kumulatif Kategori
1 HR ROUND PL.S-1K3006 22,18 A
2 CK YSM - 30 D1.80 MC 3 38,99 A
3 HR MT 1125-A (M5 X 12) 54,42 A
4 HR 104L-B S-1K6024 66,76 A
5 HR64S-D TSAS 3X15 IDE 74,99 B
6 HR ROUND PL.S-1K3004 82,63 B
7 HR HEX. K7 B 6.90 88,51 B
8 HR HEX. K8 B 7.90 93,80 B
9 CK YSM - 30 D1.80 MC 2 97,94 C
10 CK YSM - 30 D1.80 MC 1 100,00 C

Based on the table above, items in sequence number 1  From the results of calculations using the EOQ Method
to 4 have a cumulative value ≤ 70%, so they are included in for Category A, differences in Total Inventory Cost
Category A. Meanwhile, items in sequence number 5 to 8 (TIC) have been found before and after using the EOQ
have a cumulative value ≥ 70% ≤ 95%, so they are included calculation for each item, which can be seen in Table 8
in Category B, and items in sequence number 9 and 10 have below.
a cumulative score ≥ 95%, then they are included in
Category C.

Table 8 Differences in Total Inventory Cost (TIC) Before and After EOQ Calculation
No Item TIC Before EOQ TIC After EOQ Difference
1 HR ROUND PL.S-1K3006 IDR 4.602.455 IDR 3.696.231 IDR 906.224
2 CK YSM - 30 D1.80 MC 3 IDR 2.838.700 IDR 2.714.191 IDR 124.509
3 HR MT 1125-A (M5 X 12) IDR 3.513.750 IDR 2.893.338 IDR 620.412
4 HR 104L-B S-1K6024 IDR 3.665.750 IDR 3.169.492 IDR 496.258
Total IDR 2.147.403

Based on the table above, the Bolt Company can save SUGGESTIONS
total ordering costs and total storage costs of IDR 2,147,403
per year based on item calculations that have been  Based on the results of the research that has been
determined for the period January to December 2023. carried out, there are several suggestions that the author
puts forward, namely as follows:
 Optimizing raw material inventory in the warehouse can
be done by combining the Always Better Control (ABC)  Companies should review their raw material inventory
Analysis Method with the Economic Order Quantity policies based on research results using Always Better
(EOQ) Method. The first step is to calculate the ABC Control (ABC) Analysis and the Economic Order
Analysis to find category A raw materials which are the Quantity (EOQ) Method. Where the company can save
raw materials with the highest priority, then calculate the total ordering costs and total storage costs of IDR
EOQ value for each raw material. The EOQ value helps 2,147,403,-, which is a total cost savings of 14.69% of
in determining the quantity of raw material orders that the costs previously incurred.
are more economical. So the company gets the benefit of  By using the Economic Order Quantity (EOQ) method,
reducing total inventory costs including ordering and the company can optimize the total inventory of
storage costs, as well as minimizing shortages of raw Category A raw materials in the warehouse from 61,000
material stock in the warehouse. pcs to 2,831 pcs each time the order is reordered with a
predetermined order frequency, thereby saving costs and
storage space.
 Companies should improve the raw material inventory
system in the Enterprise Resource Planning (ERP)
system used, which includes raw material order lead
times, starting from calculating demand for raw
materials, purchasing raw materials, to storing raw
materials again so that they can support the Analysis
function Always Better Control (ABC) and the
Economic Order Quantity (EOQ) method run
automatically, so you can make decisions quickly and
precisely with better data accuracy.

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