[ Syndicate 10 – YP 61 B ]

1. Doma Ismayanto (29119018)

2. Ridha Shabrina (29119058)
3. Anugrah Ramadhan Harry (29119100)
4. Ezza Oktavia Utami (29119170)

INVENTORY MANAGEMENT IN THE INDUSTRY 4.0 ERA

A. Background
Inventory management is a business process which is held responsible for developing and
managing the inventory levels, whether the inventory is raw materials, semi-finished materials or
finished goods, so that adequate supplies must always be available and the firm must make sure that the
cost of over or under stocks are always low. Sachin Agarwal (2014) according to author Inventory
Constitutes the furthermost essential part of industries. It is very important to manage inventories
efficiently to evade the expenses of fluctuating production rates, excessive cost of sales and back order
consequences during periods of peak and vigorous demand. The model provides the optimal solution
in closed form which aids to know about the performance of the inventory system. The closed-form
solution is also easy to calculate. The objective is to find the economic order quantities for warehouse
which reduce the total cost.
Inventory management is a complex process, particularly for larger organizations, but the basics
are essentially the same regardless of the organization's size or type. In inventory management, goods
are delivered into the receiving area of a warehouse in the form of raw materials or components and
are put into stock areas or shelves.
Compared to larger organizations with more physical space, in smaller companies, the goods may
go directly to the stock area instead of a receiving location, and if the business is a wholesale distributor,
the goods may be finished products rather than raw materials or components. The goods are then pulled
from the stock areas and moved to production facilities where they are made into finished goods. The
finished goods may be returned to stock areas where they are held prior to shipment, or they may be
shipped directly to customers.

B. Inventory Management Theories

An inventory management system provides the organizational structure and the operating
policies for maintaining and controlling goods to be stocked. Based on whether the decision is just a
one-time purchasing decision where the purchase is designed to cover a fixed period of time and the
item will not be reordered, or the decision involves an item that will be purchased periodically where
inventory should be kept in stock to be used on demand.
The inventory management system devided into :
1. Single-period systems
System to answers the question of how much to order when an item is purchased only one time and
it is expected that it will be used and then not reordered. The optimal stocking level, using marginal
analysis, occurs at the point where the expected benefits derived from carrying the next unit are less
than the expected costs for that unit. Keep in mind that the specific benefits and costs depend on the
problem. In symbolic terms, define :
Co = Cost per unit of demand overestimated
Cu = Cost per unit of demand underestimated
by introducing probabilities, the ecpected marginal cost equation becomes :
P ( Co ) ≤ ( 1 – P ) Cu
Where Pis the probability that the unit will not be sold and 1 – P is the probability of it sold because
one or the other must occur. Then, solving for P, we obtain :
𝐶𝑢
𝑃 ≤
𝐶𝑜 + 𝐶𝑢
that equation states that we should continue to increase the size of the order so long as the probability
of selling what we order is equal to or less that the ratio Cu / ( Co + Cu ).
This system useful for a wide variety of service and manufacturing applications, such as :
a. Overbooking of airline flights.
It is common for customers to cancel flight reservations for a variety of reasons. The cost of
underestimating the number of cancellations is the revenue lost due to an empty seat on a flight.
The cost of overestimating cancellations is the awards, such as free flights or cash payments, that
are given to customers unable to board the flight.
b. Ordering of fashion items.
A problem for a retailer selling fashion items is that often only a single order can be placed for the
entire season. This is often caused by long lead times and the limited life of the merchandise. The
cost of underestimating demand is the lost profit due to sales not made. The cost of overestimating
demand is the cost that results when it is discounted.
c. Any type of one-time order. For example, ordering T-shirts for a sporting event or printing maps
that become obsolete after a certain period of time.
2. Multiple-period systems.
Designed system to ensure that an item will be available on an ongoing basis throughout the year.
There are two general types of multiperiod inventory systems:
a. Fixed–order quantity models, as “event triggered”, is initiates an order when the event of
reaching a specified reorder level occurs and also called the economic order quantity and Q-model.
b. Fixed–time period models , as “time triggered”, is limited to placing orders at the end of a
predetermined time period and also referred to variously as the periodic system, periodic review
system, fixed order interval system, and P-model.
The comparison of Fixed-order quantity & fixed -time period reordering inventory systems :

Inventory management uses a variety of data to keep track of the goods as they move through the
process, including lot numbers, serial numbers, cost of goods, quantity of goods and the dates when
they move through the process. The techniques to use:
1. Economic Order Quantity(EOQ)
The economic order quantity is the quantity at which, the ordering & carrying cost is low. This is
the quantity of a material that can be purchased at least costs. It involves 2 types of costs:
a. Ordering Costs
It is the cost related to the bringing the inventory to the production system. It includes all costs
which are directly or indirectly involved in bringing the inventory to the production system. Costs
included in ordering costs are tendering cost, quality inspection cost, transportation cost etc.
b. Carrying Costs
It is the cost which is associated with costs which are spent to the storage of the inventory items in
the store. It depends upon the quantity and period of time till when the inventory is to be stored. It
includes storage cost, damage cost, depreciation, handling cost, insurance cost etc.
2. Stock Level Analysis
Stock level is important for the control of materials. The following techniques are used to have
good and proper control materials are minimum stock level, reorder level and maximum stock level.
3. Trial Error Approach
According to this approach, the carrying and acquisition costs for different sizes of orders to
purchase inventories are computed and the size with the lowest total cost (ordering plus carrying) of
inventory is the economic order quantity.

C. How Industry 4.0 Can Enhance Performance Of Inventory Management

Industry 4.0 is the trend towards automation and data exchange in manufacturing technologies and
processes which include cyber-physical systems (CPS), the internet of things (IoT), industrial internet
of things (IIOT), cloud computing, cognitive computing and artificial intelligence. Industry 4.0 is a
promising approach based on integration of the business and manufacturing processes, as well as
integration of all actors in the company’s value chain (suppliers and customers). Technical aspects of
these requirements are addressed by the application of the generic concepts of Cyber-Physical Systems
(CPS) and industrial Internet of Things (IoT) to the industrial production systems.
The Industry 4.0 ‘execution system’ is therefore based on the connections of CPS building
blocks. These blocks are embedded systems with decentralized control and advanced connectivity that
are collecting and exchanging real-time information with the goal of identifying, locating, tracking,
monitoring and optimizing the production processes. Furthermore, an extensive software support based
on decentralized and adapted versions of Manufacturing Execution Systems (MES) and Enterprise
Resource Planning (ERP) is needed for a seamless integration of manufacturing and business processes.
The third important aspect is handling of a big amount of data collected from the processes, machines
and products. Typically the data is stored in a cloud storage. This data requires extensive analytics that
lead from the ‘raw’ data to the useful information and, finally to the concrete actions that support an
adaptive and continuously selfoptimizing industrial production process.
Today we are in the industrial 4.0 that was triggered by the development of Information and
Communications Technologies (ICT). Its technological basis is smart automation of cyber-physical
systems with decentralized control and advanced connectivity (IoT functionalities). The consequence
of this new technology for industrial production systems is reorganization of classical hierarchical
automation systems to self-organizing cyber physical production system that allows flexible mass
custom production and flexibility in production quantity.
D. The Practice Of Inventory 4.0
Regarding inventory management, Industry 4.0 is expected to achieve opportunities in terms of
decentralized self-regulation and efficiency. Industry 4.0 in inventory management like the model in
the picture below which consists of 2 dimensions, namely:
1. Fisk Supply Chain Dimensions
Autonomous and self-controlled logistic sub-systems such as transportation (for example the use
of blockchain technology) that interact with each other
2. Digital Data Value Chain Dimensions
The form of machines and sensor data (at the level of physical objects) along the entire supply
chain. Through the connectivity layer the data collected is provided for all types of analytics (for
example in the cloud), possibly generating potential value-added service businesses.
From this two-dimensional application model, three component values will emerge that are
expected by the customer. First, the value of availability means making products and services available
to customers through autonomous delivery. Value creation through the availability of goods or services
is the main added value of logistics and service activities. Second, the value of digital integrase arises
through permeable transparency and traceability along the supply chain. Third, consumption, usually
exceeds the point of sale (POS), but this does not mean the supply chain ends at this point. There are
several choices of IT-based services that are simple beyond the distribution of physical products or
services.
Technological progress is an absolute requirement to welcome the industrial revolution 4.0. In
logistics, there is a need to digitize supply chains. Digitization of the supply chain will be able to cut
logistics costs so that services in logistics can be more transparent and efficient. Logistics management
prioritizes management, including the flow of goods within the company. Orientation on planning and
framework that results in a single plan for the flow of goods and company information. With the
Internet of Things, logistical stakeholders expect integrated transparency and control (right products,
at the right time, place, quantity, condition and the right place) in the optimization and efficiency of
logistics activities.
Industry 4.0 is changing the way we work across the supply chain. Using AI, sensors and Internet
of Things (IoT) technology, a smart and data-driven distribution center can be developed. For example,
by cross-referencing enterprise resource planning (ERP) systems with consumer trends data, AI
technology can automatically order the correct amount of raw materials to fulfil orders, reducing waste
and increasing profit.
1. Inventory level efficiency
With insight into future demand, AI can also help with forecasting the demand of your suppliers,
based on previous orders. This means crucial decisions can be made to optimize stock levels. For
example, if AI software lets a distributor know that many other distributors will want the same
 equipment in 12 months’ time, it would be sure to jump the queue and get ahead by ordering it much
sooner than this.
2. Cost of goods sold
Why does it matter if inventory levels aren't optimized? Well, it’s related to inventory level
efficiency. Cost of goods sold (COGS) will reduce since costs of holding inventory don’t beyond its
use. It will be freeing up cash and storage space creates the potential for savings.
3. Lead times
As Industry 4.0 empowers supply chain to manage different orders faster, lead times for customers
will shorten. However, this increases the pressure to deliver on time, every time. To alleviate this, AI
enables to spot gaps in your inventory before it’s too late, and maintain long-lasting customer
relationships, built on trust and reliability.
Using AI for inventory management can help to avoid poor decisions, as well as inform new
investments. However, this improvement won’t happen overnight. The success of this software will
rely heavily on high data granularity, and businesses need to make sure they are building AI readiness
now. Granularity is used to characterize the scale or level of detail in a set of data, of which AI is
highly dependent on. The greater the granularity, the deeper the level of detail across the data.

E. Conclusions
Inventory management is a business process which is held responsible for developing and
managing the inventory levels, whether the inventory is raw materials, semi-finished materials or
finished goods, so that adequate supplies must always be available and the firm must make sure that the
cost of over or under stocks are always low. The inventory management system we have to track variety
of data of the goods as they move through the process, including lot numbers, serial numbers, cost of
goods, quantity of goods and the dates when they move through the process.
In the Industry 4.0 Inventory management process can be shortened automatically, cost efficiency,
and increasing quality control management of inventory. Industry 4.0 is changing the way we work
across the supply chain. Using AI, sensors and Internet of Things (IoT) technology, a smart and data-
driven distribution center can be developed, for example the flow of goods of inventory will be
converted as a data and generated automatically by software and counted as well. It makes a big
efficiency of costs and time to calculate it manually also the effectiveness of calculation of the
inventory.
Inventory is used to decouple demand and supply, to buffer variability in demand and supply.
Implementing new planning algorithms will significantly reduce the uncertainty (the standard deviation
of the demand/supply or forecast error), making safety stock unnecessary. The other important variable
to drive inventory is the replenishment lead time: with more production of lot size 1 and fast
changeovers, the lead time will be reduced significantly. Also, long transport time will be reduced, due
to a significant increase in local-for-local production.
References
Barreto, A. L., & Pareira, T. (2017). Industry 4.0 Implications in Logistic: an Overview. Procedia
Manufacturing, 1245-1252.
Jacobs, R. F., & Chase, R. B. (2018). Operations and supply chain management (15th ed.). New
York: McGraw-Hill Education.
Purnaya, I. (2019). Dampak Industri 4.0 Terhadap Manajemen Pergudangan. Jurnal Logistik
Indonesia, 3, 61-67.
Rojko, A. (2017). Industry 4.0 Concept: Background and Overview. iJIM, 11, 4532. Retrieved from
https://online-journals.org/index.php/i-jim/article/viewFile/7072/4532
Wilkins, J. (2019, January 4). Inventory Management 4.0. Retrieved from Automation.com:
https://www.automation.com/inventory-management-40