Grace's overview on JIT and EOQ Inventory Control Model

The article "A comparative analysis of inventory costs of JIT and EOQ purchasing" by Faraneh Fazel pretty much discusses how to make the decusion of whether or not switch to the just-in-time(JIT) purchasing policy. Traditional inventory management techniques many underemphasize the costs of maintaining inventories. JIT may underemphasize the costs of not maintaining invemtories, particularly since such costs are often difficult to identify and measure.

The author came up a mathematical model showing the cost difference(Z) between using EOQ and JIT. EOQ will be the less costly alternative for Z<0,>0. Meanwhile, for an item with a given demand, companies also can find the highest price that they can pay to purchase the item on a JIT basis and still be economically better off than using EOQ purchasing. This highest price can be obtained by setting Z=0. For prices higher than this highest price, Z will be negative, making EOQ a lower cost alternative. Determination of this price level provides valuable information for companies when negotiating a delivery price with their JIT suppliers.

First of all, the break-even demand is a function of EOQ and JIT delivery prices and inventory holding and ordering costs. Also, the lower the carring cost or the odering cost assciated with the EOQ model, the lower will be the point indifference between rhe JIT and EOQ models, and the wider the range of demand over which EOQ is cost effective. Secondly, the larger the premium the manufacturer pays for purchasing items on a JIT basis, the smaller the range of annual demand for which JIT is preferred. Thirdly, a choice between JIT and EOQ will impact the fixed costs. Certain fixed costs under EOQ, such as the costs associated with operating some storage facilities which include rental, utilities, and personnel salaries of these facilities, may be eliminated under JIT. Alao JIT purchasing significantly reduces the paperwork volume and saves time for purchasing personnel by using long-term contracts instead of multiple purchase orders and by sharing the buyer's production plans and schedules with trusted suppliers and integrating the suppliers into buyer's purchasing programme.

One thing to notice is that since the parameters establishing the break even point vary from one product to another, the most suitable purchasing policy in a given manufacturing environmrnt may well be a combination of both systems.