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Inventory Model Design Of Raw Material With Economic Order Quantity-

Vendor Management Inventory-Consignment Approach

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Proceedings of the Asia Pacific Industrial Engineering & Management Systems Conference 2017

Inventory Model Design Of Raw Material With Economic

Order Quantity –Vendor Management Inventory -
Consignment Approach
Tiena Gustina Amran
Department of Industrial Engineering
Trisakti University, Jakarta, Indonesia
Tel: (+62) 21-566-3232, Email: tiena@trisakti.ac.id; amran.tiena@gmail.com

Dwi Setyoko Haribowo

Department of Industrial Engineering
Trisakti University, Jakarta, Indonesia
Tel: (+62) 21- 566-3232, Email: dwisetyoko@yahoo.com

Abstract. The paper aims to determine the inventory of raw materials with Economic Order Quantity, Vendor
Manangement Inventory and Consignment. Based on the relationship between buyers and suppliers, it is necessary to
have a model that integrates inventory management model between buyers and suppliers. The model covers plans for
supply control continuous review of having a relatively higher setup cost compared to serving cost makes Economic
Order Quantity (EOQ) a more appropriate alternative to Just In Time. Partial determination of EOQ causes inventory cost
optimization to only occur on the buyer’s side, which in turn hampers buyer-supplier relationship. As such, an integrated
EOQ inventory model between suppliers and buyer through Vendor Managed Inventory (VMI) has been developed.
EOQ-VMI integration can reduce the supplier’s inventory cost, but on the other hand the buyer’s inventory cost is
increased. However, the overall total of the inventory cost of supplier and buyer becomes lower than using traditional
EOQ. In total, the inventory system cost is lower the buyer inventory cost 0.29% and lower the supplier inventory cost
to 0.04%. Based on sensitivity analysis, the inventory model can be applied even when there is a 30% increase or
decrease in number of demand, price, setup cost, and holding cost. To address this situation, a consignment agreement
was developed which determines the parties to bear the inventory costs.

Keywords: supplier-buyer relationship, Economic Order Quantity, Vendor Management Inventory

1. INTRODUCTION Previous research regarding EOQ includes the EOQ

The ever increasing competition between industries
have driven the automotive manufacture companies to
pay more attention in their supply in other to develop
better strategies in collaboration and coordination
strategies in buyer- supplier relationship.
The competition between manufacturing companies
in Indonesia is experiencing a significant development
and progress (Gaikindo, 2011). Companies must be
attempting to inovate and find the alternative solution to
face the competition. A discrepancy between demand and
supplier and in production amount with no supplier
involved has caused a non beneficial relationship between
the buyer and supplier demanding the saving of total
inventory cost (Valerie, 2011). A supply chain model and
inventory control has been developed to increase
competitiveness (Mileff and Nehez, 2006) especially in
supply management that affects the company performance
(Goyal and Gupta, 1989).
. A traditional supplier and buyer concept is known as
Traditional EOQ Model based on Economic Order
Quantity (EOQ). In the Economic Order Quantity (EOQ)
inventory model, order quantity is determined by buyer.
inventory model Joint Lot Size Or Buyer And Seller
(Avjit Baneerjee 1986) in the condition of transaction,
aboutprice, lot size etc. Has along the negosiation between
buyer and seller. It depends on the equilibirium could be
closed to optimal for both. The formula from EOQ attach
to Harris by Hadley and Within its known and used in
concept of buying and inventory management (Amran,
Tiena 2009). Fazel (1997) in the Just In Time (JIT) and
EOQ inventory cost comparison analysis; Schniederjans
(2000) researched an analysis of alternative inventory cost
JIT and EOQ, and Gonzales (2010) Economic Order
Quantity and Reorder Point Inventory Control.
This model then developed by integrating into Buyer-
Vendor Relation Model. Vendor Managed Inventory, a
research on: Buyer Vendor Coordination (Goyal and
Gupta, 1989), Buyer Supplier Relationship (Burt, 2003)
Integration of Buyer-Vendor in Supply Chain
Management (Goyal dkk, 2005), Supplier-Customer
Relationship in Automotive Supply Chains (Naude, 2012).
Hariastuti (2010) Analysis of raw material control with
EOQ method, Valerie (2011) The comparisons between
EOQ and JIT method. Development of Buyer-Vendor
Relation model is conducted by Viswanathan and Piplani
Proceedings of the Asia Pacific Industrial Engineering & Management Systems Conference 2017
(2001) in Analysis of inventory benefit in supply chain by
applying VMI strategy, Dong and Xu (2002) Evaluate the
VMI affect towards Supply Chain, Kuk (2003) Vendor
Managed Inventory (VMI) in Electronic Industry,
Rudiansyah and Tsao (2005) Heuristic formulation and
model for Vendor Managed Inventory Routing model
(VMIR), De Toni and Zamolo (2005) Model
replenishment with Efficient Consumer Responde (ECR)
in VMI, Yao dkk (2005) Discuss the supply chain
integration in VMI, Ambrosino and Scutella (2005)
Distribution network design in VMI, Piplani (2006)
Implementation of VMI in electronic manufacturing
company, Marques dkk (2008) Discussion of VMI
concept, Hartini and Kamal (2010) A policy for order
fulfilment with VMI, Mahamani and Rao (2010)
Development of VMI Model for single supplier and single
buyer.
The development of VMI concept towards strategy
is conducted by Viswanathan and Piplani (2001)
Evaluation of the VMI affect towards Supply Chain,
Inventory Benefit Analysis in supply chain by applying
VMI strategy, Dong and Xu (2002), Kuk (2003) Vendor
Managed Inventory (VMI) in Electronic Industries,
Rusdiansyah and Tsao (2005) Heuristic formulation and
model for Vendor Managed Inventory Routing (VMIR)
model, De Toni and Zamolo (2005) Replenishment
model with Efficient Consumer Response (ECR) in
VMI, Yao dkk (2005) A discussion of supply chain
integration towards VMI, Ambrosino and Scutella
(2005) Distribution network design in VMI, Piplani
(2006) VMI Implementation in Eelectronic manufacture
company, Marques dkk (2008) A discussion of VMI
concept, Hartini and Kamal (2010) A policyfor order
fulfilment with VMI; Mahamani and Rao (2010) )
Development of VMI Model for single supplier and
single buyer, Ziaee and Baouquard (2010) Analysis of
cost and lot size in VMI model, Sitompul (2012)
Development of Inventory Model managed by vendor
(VMI)
Following is the consignment agreement model.
Valentini and Zavanella (2003) Consignment Inventory: A
study case of industry and performance analysis,
Saraswati dkk (2011) Determination of Joint Lot Size with
Consignment, Joy dkk (2013) Determination of Joint Lot
size with Bargaining Game and Consignment, Wangsa
and Iskandar (2013) The development of Consignment
Stock Model in the Eselon Supply Chain 2 system,
Poonam and Bedi (2014) Comparison of consignment cost
structure and Vendor Managed Inventory, Dwi Setyoko
and Tiena G. Amran (2015) EOQ-VMI-Consignment Raw
material inventory model. The purpose of the research is
to design an inventory model and to determine integrated
order quantity by taking account with supplier and buyer
inventory cost in order to increase profit and to understand
the profit distribution of buyer and supplier.
1.1. Model Formulation for Economic Order Quantity-
Vendor Management Inverntory- Consignment
The research is focused on creating an integrated
inventory management model between buyers and
suppliers. The model covers plans for supply control
continuous review of having a relatively higher setup cost
compared to serving cost makes Economic Order
Quantity (EOQ) a more appropriate alternative to Just In
Time. The integration of EOQ-VMI can reduce vendor
inventory cost, however buyer inventory cost may
increased. Yet the total vendor buyer inventory cost is
lower than with traditional EOQ. To overcome this, a
Consignment agreement is developed, this is to determine
which of the parties that will cover the inventory cost.
1.2 EOQ VMI Model
To reduce schedule instability, it could be done by
raising relationship between two parties involved. In this
level, one of the parties agrees to give information
(information sharing, IS), it coud be an inventory status,
order forecast, production schedule that can be exchanged
and utilized by both parties so the company performance
and the whole supply chain system can be more efficient.
One of the strategy that could be dperformed is Vendor
Managed Inventory (VMI).
In the EOQ and VMI inventory model, order
quantity size is determined by supplier. Supplier will
combine the supplier setup cost (Ss) and buyer order cost
(SB). Economic Order Quantity Q S is obtained through this
equation:
√ (8)
Total buyer inventory cost is a sum of material
purchase cost and holding cost.
( ) (9)
Total supplier inventory cost is :
( ) ( ) (10)
1.3. EOQ VMI Consignment Model
In EOQ VMI Consignment (EOQ-VMI-Cs) inventory
model, the decision to determine order quantity and
delivery schedule is performed by supplier. Order cost is
charged to supplier as well as the holding cost. Below is
the agreement in EOQ VMI Consignment inventory
model:
1. The needs of order and delivery schedule is
determined by supplier.
2. Order cost is charged to supplier.
3. The ownership of the inventory, wheter in
supplier or buyer’s place, belongs to supplier.
Although the product has been delivered to
buyer, the ownership is still on supplier until the
product is used by buyer.
4. Holding cost, whether in supplier or buyer, is
charged to supplier.
Proceedings of the Asia Pacific Industrial Engineering & Management Systems Conference 2017

( ) ( )

Table 1. The Comparison Methods of EQQ-VMI

Consignment
EQQ EQQ-VMI EQQ-VMI ( ) ( )
Consignment
Order Buyer Supplier Supplier
Determination
Order cost (b0) Buyer Supplier Supplier ( )
Setup cost (hS) Supplier Supplier Supplier
Inventory cost in Buyer Buyer Supplier ( ) (15)
buyer (hB) From the equation (14) and (15) inventory cost is obtained
Inventory cost in Supplier Supplier Supplier =
supplier (hs)
Supply ownership Buyer Buyer Supplier [( )
in buyer
( )] (16)
Supply ownership Supplier Supplier Supplier
in supplier
1.4. Limitation of EOQ-VMI-Cs Model

In the Economic Order Quantity (EOQ) inventory model
with VMI and Consignment (Cs), the buyer holding cost
(hB) and supplier holding cost (hS) is charged to supplier
and the determination of order quantity is under the
authority of supplier (QS’).
Buyer inventory cost TB is only purchase cost (wy),
(11)
EOQ-VMI-Cs inventory model can be used if and
only if the inventory cost total with EOQ-VMI-Cs is
lower than the total in traditional EOQ inventory cost
model.
From equation (7) and (16) it is obtained

Holding cost is to be (hB + hS) ( ) and order cost is [( ) ( )]

( ) is covered by supplier. Setup cost is charged to

[( )
supplier ( ).
Supplier inventory cost , is obtained by summing ( )]
the production cost (cy), setup cost, order cost and
holding cost. [( ) ( ) ] (17)
Therefore, a matemathic equation is obtained for supplier
inventory cost. From equation (17) it is known that ,
if and only if the setup cost/order cost ratio is higher than
( ) ( ) (12) supplier inventory cost ratio divided by buyer holding
Total inventory cost system is a sum of buyer inventory cost
cost and supplier inventory cost.
= (13) ( ) ( ) (18)
Subtitution of equation (11) and (12) in equation (13)
= ( ) ( ) (14) EOQ-VMI-Cs can be accepted by supplier if and only if
the supplier inventory cost with EOQ-VMI-Cs is lower
The first derivation of total inventory cost towards
than supplier inventory cost with traditional EOQ.

[( ) ( )]
( ) ( )

Order quantity will be optimum for EOQ-VMI-Cs model ( ) ( )

( )
if , then
[( ) ( )]

( ) ( )
Proceedings of the Asia Pacific Industrial Engineering & Management Systems Conference 2017

Cost (w)
{ [( ) ( ) ] } (19) Order Cost (SB) Rp 100.000 /order
Buyer Holding Cost (hB) Rp 970,2 /kg/year
Lead Time Delivery (bb) PT ANI (L) 2 days,1 month (N)
= 20 days.
2. CASE STUDY Vendor Inventory Data Rp 26.518 / kg
Distribution-production Cost (c)
This section presented the case study on PT.MAPI Setup cost (SS) Rp 2.651.760 /setup
(buyer) and PT. ANI (supplier) in the Body Assy Throttle Vendor Holding Cost (hS) Rp 1.164,24 /kg/year
for raw material alumunium ADC-12 to proposed the
integrated model EOQ –VMI with Consignment. Figure 4
shows the inventory system using Vendor Managed Table 2. The Results of Traditional EOQ Calculation
Inventory (VMI). In this system, supplies are integrated Lot Size (QB) 15.875 kg/lot
between supplier and buyer (PT. MAPI and PT. ANI). Order Frequency (m) 77 times/year
Buyer and supplier is no longer concern about policy Supplier Cost (TS(QB)) Rp 32.633.115.361
respectively, yet to concern about collaboration policy as Buyer Cost (TB(QB)) Rp 36.037.245.929
one system of supply chain. Buyer and supplier has a Supplier Profit ( ) Rp 3.388.728.368
dependency to each other in inventory system. Both Buyer Profit ( ) Rp 8.686.453.502
companies must work together, to give information and be Total Profit ( ) Rp 12.075.181.870
open to each other to generate an optimum inventory
model. The buyer, in this case PT. ANI, receives product
order from it’s customer and then responsible to inform In the traditional system, buyer always set schedule
the order to supplier. Buyer is no longer perform ordering and order quantity based on their existing information.
process. The supplier is the one who responsible to set Supplier will respond to the order passively, without
and control the supply level. Supplier will determine the further follow up to know why they buy such an amount.
order number/size that is economical and then produce the Changes that usually encountered the order can cause
raw materials in accordance with the economical number schedule instability. This can caused low service level,
of raw material order. The raw materials will be soon knowing that many order are failed be fulfilled and caused
delivered to buyer. The buyer and supply costs, in this an increase in inventory cost.
case, the buyer only have to pay for holding cost, because
buyer is no longer have to perform order for raw material 2. 2 EOQ VMI Model
directly. The order cost is covered by supplier. In the VMI
supply system, supplier covers the inventory costs such as Table 3. The Results of EOQ –VMI Calculation
holding cost, setup cost, and order cost/replenishment Lot Size (QS) 76.021 kg/lot
Here is the a table summarizing the results of three Order Frequency (m) 16 times/year
Inventory Design Model : 1). EOQ Trasiditional, Supplier Cost (TS(QS)) Rp 32.508.166.566
Inventory cost 2). EOQ –VMI and Model 3). EOQ – Buyer Cost (TB(QS)) Rp 36.058.721.734
VMI with Consignment Model for automotive parts and Supplier Profit ( ) Rp
components manufacturer. 3.513.677.163
Buyer Profit ( ) Rp 8.664.977.697
2.1 Raw Material Purchasing Cost,Order Cost, Total Profit ( ) Rp 12.178.654.861
Holding Cost and Stockout Cost.

Raw Material Purchasing Cost Table 4. The Method Comparisons Between Inventory
Purchasing Cost (PT. MAPI) = Rp 29.464 /kg. (ordering Costs in EOQ and EOQ-VMI
cost),
Order Cost (PT ANI) = Rp. 20.000. Traditional EOQ-VMI Saving
Administration Cost = Rp. 30.000. EOQ (Rp) (Rp) /year (Rp)
Material Handling Cost = Rp. 50.000. Supplier 32.633.115.361 32.508.166.566 124.948.795
Total Vendor Order Cost (SB) = Rp 100.000 /order cost
Holding cost (hC) PT ANI Rp 150.000 m3/month or Rp TS(Q)
1.800.000 m3/year or Rp 970,2 /kg/year. Buyer 36.037.245.929 36.058.721.734 -
cost 21.475.804
TB(Q)
Buyer Inventory Data 2.037.619 pcs/year Total 68.670.361.291 68.566.888.300 103.472.991
Goods demand (D) System
Sales Cost (p) Rp 21.949 /pcs Cost
Raw Material Demand (y) 1.222.571 kg/year
Raw Material Purchasing Rp 29.464 /kg
Proceedings of the Asia Pacific Industrial Engineering & Management Systems Conference 2017

In EOQ with VMI, buyer and supplier may cut the
inventory cost because supplier can accurately determine
the number of alumunium ADC-12 raw material to be
produced and delivered to buyer. Supplier has no longer
needed to perform estimation that can cause the lack or
excess material that can increase inventory cost too high.
Supplier may also have a more efficient setup cost. Table
3 shows the supplier inventory cost can be cut by Rp.
124.948.795 per year. Although the regular total of
inventory system can be saved to Rp. 103.472.991 per
year, the buyer inventory cost has increased to Rp.
21.475.804 per year. This result is definately not a
satisfaction to buyer, so it is necessary to develop an
agreement that can generate win-win relationship for both
sides.
2.4. Analysis of Model Sensitivity
Sensitivity analysis is conducted by changing the
number of demand, price, setup cost and holding cost (see
Figure 1. Figure 2. Figure 3 and Figure 4) . Changes are
done with 30% increase to 30% decrease interval.The
change of value weight in each criterias is done by
decreasing or increasing the number of demand, price,
setup cost and inventory cost. This is to see the result
tendency of EOQ VMI Consignment inventory model
wether it will change or not.The trial of the weight change
in every point, was increased or decreased, from the initial
value weight in the trial at 10%, 20% and 30% point. As
for sensitivity analysis of the ctriterias and subcriterias is
shown on the tables below :

2.3. EOQ –VMI Model with Consignment

An approach toward VMI Consignment combines

buyer order cost and supplier setup cost. In VMI
Consignment, supplier holding cost is included with buyer
holding cost, so that (hS + hB) could be obtained. The
optimum lot size shall become:

Table 5. The Results of EOQ –VMI Consignment Figure. 1. Sensitivity Analysis to Demand
Calculation
Lot Size (QS) 56.146 kg/lot
Order Frequency (m) 22 times/year
Supplier Cost (TS(QS’)) Rp 32.539.498.685
Buyer Cost (TB(QS’)) Rp 36.021.843.730
Supplier Profit ( ) Rp 3.482.345.045
Buyer Profit ( ) Rp 8.701.855.701
Total Profit( Rp 12.184.200.746 Figure 2. Sensitivity Analysis to Setup Cost
)

Table 6. The Method Comparisons Between Inventory

cost in EOQ with EOQ-VMI-C
Traditional EOQ-VMI-C Saving/year
EOQ(Rp) (Rp) (Rp)
Supplier 32.633.115.361 32.539.498.685 93.616.676
Cost
TS(Q) Figure 3. Sensitivity Analysis to Purchasing Cost
Buyer 36.037.245.929 R36.021.843.730 15.402.200
Cost
TB(Q)
Sum of 68.670.361.291 68.561.342.415 Rp
System 109.018.876
Cost

Results in Table 6 shows that by applying a

consignment agreement between supplier and buyer, can
generate saving Rp. 109.018.876 per year if compared to
Traditional EOQ inventory system. Other than Service
Level which the consignment agreement can generate
saving to supplier which is Rp. 93.616.676 per year and to
buyer which is Rp. 15.402.200 per year. This relationship
can be noticed as a win-win relationship for both parties.
Figure 4. Sensitivity Analysis to Holding Cost
In EOQ-VMI-Cs inventory model, the result shows that
the lot size of economic order is 56,146 kg. Inventory
model (EOQ-VMI-Cs) gives profit to supplier in the
amount of Rp. 3.482.345.045, and to buyer Rp.
8.701.855.701 with order frequency 22 times, lead time
order 2 days, re-order point 10.188 kg. In total, the
Proceedings of the Asia Pacific Industrial Engineering & Management Systems Conference 2017
inventory system cost is Rp. 68.561.342.415, the
inventory model EOQ-VMI-Cs can lower the buyer
inventory cost to Rp 93.616.676 (0.29%) and lower the
supplier inventory cost to Rp. 15.402.200 (0.04%). Based
on sensitivity analysis, the inventory model can be applied
even when there is a 30% increase or decrease in number
of demand, price, setup cost, and holding cost.
CONCLUSION
In his paper we propose a model of EOQ-VMI-Cs
inventory in the result shows that the lot size of economic
order is gives profit to supplier and to buyer. This
relationship can be noticed as a win-win relationship for
both parties . Based on sensitivity analysis, the inventory
model can be applied even when there is a 30% increase
or decrease in number of demand, price, setup cost, and
holding cost. Thus the EOQ-VMI-Cs model can be
developed towards supply chain management, and it is
more effective if integrated with Electronic Data
Intercharge (EDI) and this model can be developed for
automotive manufacturing industry who has high setup
cost.
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