Optimizing Inventory Management in the Aluminum Industry

Oct 13, 2025 by magicalceylontours.com 19 views

Application of the Economic Order Quantity (EOQ) Method in Optimizing Alumina Inventory (Case Study: Indonesia Asahan Aluminum)

Optimizing Inventory Management in the Aluminum Industry

In the aluminum industry, effective inventory management is crucial for companies to remain competitive and profitable. One of the key challenges faced by companies in this industry is managing alumina inventory, which is a critical raw material used in the production of aluminum bars (ingot). PT. Indonesia Asahan Aluminum, the largest company in Indonesia engaged in aluminum smelting, is no exception. In this study, we will explore the application of the Economic Order Quantity (EOQ) method in optimizing alumina inventory at PT. Indonesia Asahan Aluminum.

PT. Indonesia Asahan Aluminum is a leading company in the aluminum industry, and its success is largely dependent on its ability to manage its inventory effectively. Alumina is one of the main raw materials used in the production of aluminum bars (ingot), and its inventory management is critical to the company's operations. The company's inventory management policies have a significant impact on its operational efficiency, cost, and customer satisfaction.

The Economic Order Quantity (EOQ) Method

The EOQ method is a widely used inventory management technique that helps companies determine the most economical order quantity, optimal order frequency, and establish safety stock and reorder points. This method is designed to assist companies in optimizing inventory costs by minimizing the total inventory costs, which include the cost of ordering, storage costs, and the risk of lack of raw materials.

In this study, we used the EOQ method to determine the most economical order quantity, optimal order frequency, and establish safety stock and reorder points for alumina inventory at PT. Indonesia Asahan Aluminum. We collected data on the company's inventory costs, including the cost of ordering, storage costs, and the risk of lack of raw materials, for the years 2014, 2015, and 2016. We then applied the EOQ formula to calculate the optimal order quantity, optimal order frequency, and safety stock and reorder points.

The results of this study showed that the total cost of alumina inventory with the company's policies in 2014 reached Rp. 476,918,820.54, in 2015 amounting to Rp. 498,058,123.90, and in 2016 amounted to Rp. 514,075,901.43. On the other hand, if the company implements an EOQ policy, total inventory costs in 2014 can be reduced to Rp. 362,811,020.07, in 2015 amounting to Rp. 381,230,420.68, and in 2016 amounted to Rp. 395,573,489.49.

The application of the EOQ method resulted in significant cost savings for PT. Indonesia Asahan Aluminum. The total cost savings of Rp. 114,107,800.47 in 2014, Rp. 116,827,703.21 in 2015, and Rp. 118,502,411.93 in 2016 can be utilized by the company to improve operational efficiency or be reinvested in product development.

The application of the EOQ method is not only limited to cost calculations, but also has an impact on the overall company supply chain strategy. With inventory optimization, PT. Indonesia Asahan Aluminum can ensure the smooth production, minimize the risk of lack of raw materials, and increase customer satisfaction. Furthermore, companies can conduct market analysis and demand to estimate alumina needs more accurately, so that they can adjust the purchase and production strategy with dynamic market conditions.

In conclusion, the use of the EOQ method in managing alumina inventory at PT. Indonesia Asahan Aluminum shows great potential to improve operational efficiency and reduce costs. This study confirms that optimization in inventory management is not only profitable in terms of cost, but also a strategic step in creating competitive advantage in the aluminum industry.

Based on the findings of this study, we recommend that PT. Indonesia Asahan Aluminum continues to implement the EOQ method in managing alumina inventory. We also recommend that the company conducts regular market analysis and demand forecasting to ensure that it has an accurate estimate of alumina needs. Additionally, the company should consider investing in inventory management software to improve its inventory management processes.

This study has several limitations. Firstly, the data used in this study is limited to the years 2014, 2015, and 2016. Secondly, the EOQ method assumes that the demand for alumina is constant, which may not be the case in reality. Finally, the study does not consider the impact of other factors, such as transportation costs and lead times, on the company's inventory management decisions.

Future research should focus on exploring the application of other inventory management techniques, such as the Just-In-Time (JIT) system, in the aluminum industry. Additionally, researchers should investigate the impact of other factors, such as transportation costs and lead times, on the company's inventory management decisions. Finally, researchers should conduct a comprehensive analysis of the company's supply chain strategy to identify areas for improvement.
Frequently Asked Questions (FAQs) on the Application of the Economic Order Quantity (EOQ) Method in Optimizing Alumina Inventory

Q: What is the Economic Order Quantity (EOQ) method?

A: The EOQ method is a widely used inventory management technique that helps companies determine the most economical order quantity, optimal order frequency, and establish safety stock and reorder points. This method is designed to assist companies in optimizing inventory costs by minimizing the total inventory costs, which include the cost of ordering, storage costs, and the risk of lack of raw materials.

Q: What are the benefits of using the EOQ method?

A: The benefits of using the EOQ method include:

Reduced inventory costs
Improved operational efficiency
Increased customer satisfaction
Better supply chain management
Improved forecasting and demand planning

Q: How does the EOQ method work?

A: The EOQ method works by calculating the optimal order quantity, optimal order frequency, and safety stock and reorder points based on the company's inventory costs, demand, and lead times. The method takes into account the cost of ordering, storage costs, and the risk of lack of raw materials to determine the most economical order quantity.

Q: What are the limitations of the EOQ method?

A: The limitations of the EOQ method include:

Assumes constant demand
Does not consider transportation costs and lead times
May not be suitable for companies with complex supply chains
May not be suitable for companies with high demand variability

Q: Can the EOQ method be used in other industries?

A: Yes, the EOQ method can be used in other industries, including manufacturing, retail, and healthcare. However, the method may need to be adapted to suit the specific needs of each industry.

Q: How can companies implement the EOQ method?

A: Companies can implement the EOQ method by:

Conducting a thorough analysis of their inventory costs and demand
Calculating the optimal order quantity, optimal order frequency, and safety stock and reorder points
Implementing a just-in-time (JIT) system to minimize inventory levels
Continuously monitoring and adjusting the inventory management system to ensure optimal performance

Q: What are the key performance indicators (KPIs) for the EOQ method?

A: The key performance indicators (KPIs) for the EOQ method include:

Inventory turnover
Inventory levels
Order frequency
Safety stock levels
Reorder points
Lead times

Q: How can companies measure the effectiveness of the EOQ method?

A: Companies can measure the effectiveness of the EOQ method by:

Tracking inventory costs and savings
Monitoring inventory levels and turnover
Analyzing order frequency and lead times
Evaluating customer satisfaction and service levels
Conducting regular reviews and adjustments to the inventory management system

Q: What are the future research directions for the EOQ method?

A: Future research directions for the EOQ method include:

Exploring the application of the EOQ method in other industries
Investigating the impact of other factors, such as transportation costs and lead times, on the company's inventory management decisions
Developing more advanced inventory management models and algorithms
Conducting comprehensive analyses of the company's supply chain strategy to identify areas for improvement.