Question

Companies can use the Economic Order Quantity (EOQ) method to maintain the existing inventory conditions within the company, especially to reduce the existing fixed costs that can arise from the purchase of goods using expedition services. For example, buying goods with Full Container Load (FCL) and Less Container Load (LCL), the LCL fixed cost will be greater because the goods purchased are small but the tariff for sending goods from the supplier to the factory requires no small cost, especially with shipping goods from abroad that will add costs until the terminology is formed in the practice of cost accounting is referred to as 'landing cost'. In maintaining the freshness of UHT milk, companies need to use good quality paper and can withstand water and even the freshness of dairy products is maintained even if stored at room temperature. We often see this when we go to retail stores, right? As an accountant from the UHT Dairy Products Company, you have the task of conducting a survey of the raw materials for packaging – paper from Korea that must be sent to Indonesia. Management also questioned which costs could arise and whether the company should continue to import paper when paper was needed or the need for maintaining paper stock at the factory. If companies must import paper when needed, what should be considered and what costs will occur, and vice versa? Analyze and use info graphics of the decisions that must be taken by the company along with the impacts, advantage, and disadvantage, also which methods that can be used? EOQ or Just in Time (JIT)? (30 points)

Answer 1

The Economic Order Quantity (EOQ) is the number of units that a business can add to the inventory for each order to reduce overall inventory costs — such as holding costs , order costs, and shortage costs. This is the optimum order problem and this calculation applies as demand, purchasing, and holding costs remain constant over time.

The just-in-time inventory system (JIT) is a management strategy that directly aligns suppliers' raw-material orders with production schedules. Industries use this inventory strategy to improve productivity and reduce waste by only acquiring products when they need them for the manufacturing process , which reduces the cost of inventories. This approach demands that the suppliers correctly predict demand.

In this case UHT is a milk processing company and the company's customer needs daily product delivery. When EOQ approach applies the processing is not stopped due to lack of material and the material is imported landing cost is more so in order to maintain landing cost company need to maintain sufficient vigilance when ordering rather than ordering for material when necessary.

In JIT approch material order will depend on the schedule of production if it adopts the cost of landing will be more as the customer demand will be different so we will need to request material at the time of production schedule. There is a risk in transportation of material in this case so that the availability will be disrupted.

As the content can be kept in good condition, the cost of storage should not be too much high fair rent just has to be charged.

So EOQ approach would be more fitting in this case than JIT.

Advantages:

It won't disrupt output

The cost of storage and carrying would be negligible

Because the cost of landing is high , the company will benefit from ordering sufficient material

Disadvantages:

The EOQ formula assumes that consumer demand is constant.

The calculation also assumes that the costs for ordering and holding are constant

When any changes happen regularly it will become more costly

By comparing advantages and disadvantages, Still it is beneficial to use EOQ.