Question

Inventories Management

Evaluate the difference between Just In Time and Economic Order Quantity system with empirical example. Please write in the detail.

Answer 1

Just-In-time(J.I.T.) :-

It is a management strategy that aligns raw-material orders from suppliers directly with production schedules. In which The JIT inventory system contrasts with just-in-case strategies, wherein producers hold sufficient inventories to have enough product to absorb maximum market demand.

Economic Order Quantity(E.O.Q) :-

It is a company's optimal order quantity that minimizes its total costs related to ordering, receiving, and holding inventory.

Formula for E.O.Q.:-

Q= √2*D*Co/Ch

where: Q=EOQ units

  D=Demand in units (typically on an annual basis)

  Co=Cost per order

  Ch=Cost of holding per unit of inventory

Example :- The material DX is used uniformly throughout the year. The data about annual requirement, ordering cost and holding cost of this material is given below:Annual requirement: 2,400 units, Ordering cost: $10 per order

Holding cost: $0.30 per unit. Required: Determine the economic order quantity (EOQ) of material DX using above data.

Answer:- Q= √2*D*Co/Ch

  Q= √2*2400*10/0.3

  Q= √48,000/0.3

  Q= √1,60,000

  Q= 400 Units

Number of orders per year = Annual demand/E.O.Q.

  = 2,400 units/400 units

=  6 orders per year

Ordering cost = Number or orders per year × Cost per order

= 6 orders × $10

=  $60

Holding cost = Average units × Holding Cost per unit

=  (400/2) × 0.3

= $60

Combined ordering and holding cost at economic order quantity (EOQ):

Ordering Cost+Holding Cost

= $60 + $60

= $120

However, now suppose that material DX is not used evenly but is widely used in particular season then Just in time inventory comes into picture. As in this system Company will put order depending upon demands levels. Therefore, it will order the inventory more in peak seasons when it is needed.

In above data assume that only during 4 months requirement is 2,000 units. For other 8 Months it is only 400 Units. In that case if company uses J.I.T. system then unnecessary Holding cost will be very high throughout the year which is unavoidable.

Many mass-market retailers use JIT strategies to minimize their inventory costs and provide their customers with large quantities of merchandise at just the right time.2 For example, big-box retailers Target Corporation (TGT) and Walmart Inc. (WMT) schedule their seasonal merchandise to arrive just as demand is beginning to pick up for specific items. As the season draws to a close and demand wanes, shelves are cleared to make room for the next season's items.

Summary:

1.Economic Order Quantity (EOQ) is a production method that aims at maintaining the amount of materials at a desired level at a minimum cost while Just-in-Time (JIT) is a Japanese management philosophy which aims at providing customers with the right kind and amount of stocks at the right time.

2.EOQ maintains a fixed amount of material in its inventory and has a reorder level wherein it must be replenished to avoid shortages and extra costs while JIT focuses on meeting customers’ demands on time with the right quality and quantity with minimum resource, time, and material wastes.

3.Both are intended to reduce costs and increase the company’s profitability. While EOQ is dependent on financial and marketing strategy, JIT is dependent on the work ethics and commitment of the entire workforce of the company.