A Trade-off between Overstock and Stockouts of a Perishable Raw Material with Uncertain Demands in a Cosmetics Industry

Abstract

An inventory system is a crucial aspect of any business that deals with physical goods or products. It refers to the processes, software, and strategies put in place to track and manage the company’s inventory efficiently. In a fluctuating demand situation, the importance of an inventory system becomes even more pronounced. Managing inventory effectively becomes challenging when demand is unpredictable, and having a robust inventory system can make a significant difference. A cosmetics manufacturer produces four types of body scrubs from the same type of rice groats under fluctuating product demand conditions and limited raw material shelf life, resulting in high inventory costs due to unoptimized raw material purchasing. A probabilistic inventory system was proposed based on the newsvendor model, where demands were assumed to be normal distributed. Our computation showed that the optimal rice procurement was 2,235.69 kg/month resulting a service level of 90 percent. The proposed inventory policy was able to increase the expected monthly profit from Rp 11.3 million to Rp 14.2 million, equivalent to a 25 percent increase. Results and insights for future research were discussed.

Keywords

• probabilistic inventory system
• uncertain demand
• newsvendor model
• expected profit.