Question

Assignment on EOQ, MRP and JIT

EOQ

1. Define and briefly describe EOQ.

2. List the advantages and disadvantages of EOQ

3. What kinds of organizations use EOQ?

MRP

1. Define and briefly describe MRP.

2. List the advantages and disadvantages of MRP

3. What kinds of organizations use MRP?

JIT

1. Define and briefly describe MRP.

2. List the advantages and disadvantages of EOQ

3. What kinds of organizations use JIT?

Answer 1

Definiton and explanation of EOQ.

Economic Order Quantity (EOQ) is a production formula used to determines the most efficient amount of goods that should be purchased based on ordering and carrying costs. In other words, it represents the optimal quantity of inventory a company should order each time in order to minimize the costs associated with ordering and holding inventory.
The EOQ is used as part of a continuous review inventory system in which the level of inventory is monitored at all times and a fixed quantity is ordered each time the inventory level reaches a specific reorder point. The EOQ provides a model for calculating the appropriate reorder point and the optimal reorder quantity to ensure the instantaneous replenishment of inventory with no shortages. It can be a valuable tool for small business owners who need to make decisions about how much inventory to keep on hand, how many items to order each time, and how often to reorder to incur the lowest possible costs.

Advantages of EOQ

1. Minimizes Storage and Holding Costs

Storing inventory may be expensive for small business owners. The main advantage of the EOQ model is the customized recommendations provided regarding the most economical number of units per order. The model may suggest buying a larger quantity in fewer orders to take advantage of discount bulk buying and minimizing order costs. Alternatively, it may point to more orders of fewer items to minimize holding costs if they are high and ordering costs are relatively low.

2. Specific to the Business

Maintaining sufficient inventory levels to match customer demand is a balancing act for many small businesses. Another advantage of the EOQ model is that it provides specific numbers particular to the business regarding how much inventory to hold, when to re-order it and how many items to order. This smooths out the re-stocking process and results in better customer service as inventory is available when needed.

3. Better Inventory Management

Another benefit of EOQ is that it is a key to better inventory management and when the company can manage its inventory in an effective way than it can reduce substantial operational costs which in turn will lead to more profits for the company. In simple words, EOQ indirectly helps the company in earning profits through a reduction in operational costs associated with inventory management.

Disadvantages of EOQ

1. Complicated Math Calculations

The EOQ model requires a good understanding of algebra, a disadvantage for small business owners lacking math skills. Additionally, effective EOQ models require detailed data to calculate several figures. The benefit to resolving the math is the ability to determine how much inventory should be attached to each order at the lowest possible costs. Keeping costs low will inflate margins and ultimately drive more revenue. EOQ software is one solution that may be worth the investment for small business owners lacking the time and capital to hire a consultant or employee for regular calculations.

2. Based on Assumptions

The EOQ model assumes steady demand of a business product and immediate availability of items to be re-stocked. It does not account for seasonal or economic fluctuations. It assumes fixed costs of inventory units, ordering charges and holding charges. This inventory model requires continuous monitoring of inventory levels. The effectiveness of the basic EOQ model is most limited by the assumption of a one-product business, and the formula does not allow for combining several different products in the same order.

3. Requires Continuous Monitoring

Companies in case of economic order quantity have to constantly monitor reorder levels as moment level of raw materials reaches reorder level company has to order goods from suppliers and this is where the company will need to employ staff so as to monitor stock levels which again is a time consuming as well as an expensive process.

Most of industrial units like McDonald's use EOQ method.

Definition and explanation of MRP.

Material requirements planning (MRP) is a computer-based inventory management system designed to improve productivity for businesses. Companies use material requirements-planning systems to estimate quantities of raw materials and schedule their deliveries.
MRP is designed to answer three questions: What is needed? How much is needed? When is it needed?" MRP works backward from a production plan for finished goods, which is converted into a list of requirements for the subassemblies, component parts, and raw materials that are needed to produce the final product within the established schedule.

Advantages of MRP

On-time availability of the right materials required for production.

Little, if any, excess inventory (our customers report that inventory reduced by 14% on average).

Timely delivery of manufactured goods to your customers (increased by 17%).

Optimal use of manufacturing resources (equipment downtime reduced 14%).

Decrease in capital cost due to decreased inventory levels and optimal use of production resources.

Collecting business data for analysis and better planning.

Disadvantages of MRP

With MRP being demand-oriented, this very obviously can be detrimental to a company that is not necessarily dependent on demand forecast. Without smooth demand and lead-time replenishment regularity, there is not a lot of room to adjust the system - leaving you with either too little or too much of a any given material. This is why companies that have relatively simpler operations may be a better candidate for MRP systems instead of a facility that leans more on the complex side.

MRP's other drawbacks include:

Customization Restrictions

Inflexible System; Not Compatible for Specific Organizations

Operation Process Re-Organization

Steep Cost for Installation/Operating

Organisations using MRP

Fishbowl Manufacturing.

NetSuite.

JobBOSS.

E2 Shop System.

Infor VISUAL ERP.

Global Shop Solutions.

Define and explain JIT

Just in time (JIT) is an inventory management method whereby materials, goods, and labor are scheduled to arrive or be replenished exactly when needed in the production process.
JIT works best for companies using repetitive manufacturing functions; hospitals, small companies, and other entities may not find JIT feasible. For example, let's assume that Company XYZ is a small car manufacturer. On Tuesdays the company assembles the car chassis, and the workers put the windshield in on Thursdays. With a just in time inventory method, XYZ might have parts delivered exactly one day before they need them. The chassis would be delivered on Monday and the windshield on Wednesdays.

The goal of JIT is to decrease costs by keeping only enough inventory on hand to meet immediate production needs. Thus, in order to effectively employ JIT a company must accurately forecast demand. JIT's encouragement of planning, simplification, and standardization is aimed at reducing carrying costs by eliminating the expense of housing idle materials and lower the costs of defective products, wasted space, extra equipment, overtime, warranty repair, and scrap. JIT also speeds the production process, thereby eliminating long lead times and improving delivery performance.

Companies that utilize JIT often only have a few suppliers. Due to the importance of receiving inventory when needed, a small number of suppliers make it easy to coordinate deliveries. Additionally, the large orders placed by JIT companies encourage suppliers to be committed to meeting delivery and quality requirements and offer bulk discounts, but long-term contracts may counter this benefit.

advantages of JIT:

JIT aims at keeping the stock holding to bare minimum leading to much lower inventory cost and much lower storage and warehouse cost.

Minimum inventory at all stages of supply chain means lesser expiry and lesser wastage for the organization

Lower inventory means lower investment for the same level of production. This reduces working capital investment to a greater extent. This in turn leads to better ROI and profitability for the organization

JIT manufacturing aims at producing items based on the demand. Hence all items produced will be sold. So no obsolete items in the finished goods section. It helps the organization to adapt well to any changes in product specification from the market without the fear of having any kind of waste and obsolete stocks.

To achieve JIT production, there is a need for very close communication between all the parties involved in the entire supply chain. This communication technique is often referred as “Kanban”.

In JIT, immense focus is on quality of the final product and companies work to achieve “first time right” for all goods.

Disadvantages of JIT:

JIT production can be very sensitive to any kind of error. Since bare minimum inventory levels are maintained, there is no room for any kind of error.

JIT production will not be able to adapt well to sudden increase in volume of demand from the market, since the inventory levels are maintained at much lower level.

Just in time manufacturing is a philosophy which is achieved only when all the parties involved in the whole supply chain will work in great tandem and coordination. JIT may fail sometime if any of the suppliers will fail to fulfil their obligations and respond to the requirements in a timely manner.

JIT focuses on lean inventory; hence there is not much buffer in stock levels. For any reason, if there is any kind of failure that happens in the supply chain, that can lead to sudden down time in production leading to huge losses for the organization.

Some companies that have successfully implemented JIT include Toyota, Dell and Harley Davidson.