Inventory Management - JIT and EOQ

Economic Order Quantity (EOQ) Model
The objective of inventory models is to minimize total cost. If we minimize the setup and holding costs, we will be able to minimize total cost:
Managing Inventory - JIT
Just-in-Time Inventory
Just in Time Inventory is the minimum inventory that is necessary to keep a system perfectly running.
Just-in-Time Inventory
Economic Order Quantity (EOQ) Model
Economic Order Quantity (EOQ) Model
As the quantity ordered (Q) increases, holding cost increases, And setup cost decreases. In this graph, Optimal order quantity (Q*) occurs at a point where setup cost
is equal to the total (annual) holding cost.
Economic Order Quantity (EOQ) Model
By using this fact, we can write an equation for Q* as follows: D: Annual Demand in units for the inventory item. S: Setup cost (or the ordering cost) for each order. Notice: (Setup cost for production, order cost for buying). H: Annual Holding cost of inventory per unit.
Inventory Management
Inventory is any stored resource that is used to satisfy a current or future need. Raw materials, work-in-process, and finished goods are examples of inventory. Two basic questions in inventory management are (1) how much to order (or produce), and (2) when to order (or produce).
JIT
JIT techniques focus on creating a closer, more harmonious relationship with a company’s suppliers so that both benefit from increased efficiency. JIT is “empowerment of the supplier within the customer’s organization.” In a retail environment, JIT principles are called Efficient Consumer Response (ECR), which enable retailers to replenish their inventories constantly and on an as-needed basis.
JIT attempts to reduce the investment required in inventory because it drains a company’s cash and hides a multitude of problems managers need to address. The goal is to achieve a smooth flow of materials and inventory through the business. Rather than build up costly stockpiles of inventory, JIT seeks to get items where they are needed “just in time.”
c) Expected time between orders (T) = (Working days in a year) / N = 270 / 5 = 54 days. d) Total Annual Cost = Annual Setup Cost + Annual Holding Cost = DS / Q* + (Q*)H / 2 = 1000 (10) / 200 + (200) (.50) / 2 = $100
Economic Order Quantity (EOQ) Model
With these assumptions, the graphic of inventory usage over time is as follows:
Economic Order Quantity (EOQ) Model
Example
Answers:
a) Q* = [2(1000)10 / .50]1/2 = 200 units b) Expected number of orders placed during the year (N) = D / Q* = 1000 / 200 = 5 times.
Example
Economic Order Quantity (EOQ) Model
3-) Orders arrive in one batch at a time, and they arrive in one point in time. 4-) Quantity discounts are not possible. 5-) The costs include only setup cost (or ordering cost when buying) and holding cost. 6-) Orders are always placed at the right times. Therefore, stock outs (or shortages) can be completely avoided.
Example
Questions:
a) Find the Economic Order Quantity (Q*) for this inventory model. b) How many orders should be placed during one year? c) What is the expected time between two consecutive orders? d) What is the total annual cost of this inventory model?
Economic Order Quantity (EOQ) Model
Q = order quantity (That is also equal to the Maximum Inventory) Minimum Inventory = 0 When inventory level reaches 0, a new order is placed and received.
Economic Order Quantity (EOQ) Model
EOQ model makes a number of assumptions: 1-) Demand is known and constant. 2-) Lead time (the time between placement of order and receipt of the order) is constant and known.
Economic Order Quantity (EOQ) Model
There will be (D/Q) times of ordering in a whole year. Therefore, Annual Setup cost = (D/Q) . S Average Annual Holding Cost = (Average Inventory) . H = (Q/2) . H Annual Setup Cost = Annual Holding Cost (D/Q) . S = (Q/2) . H
Inventory Management
Inventory Management
Inventory is one of the most expensive assets of many companies. It represents as much as 40% of total invested capital.
Benefits of JIT
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Lower investment in inventory. Reduced inventory carrying and handling costs. Reduced costs resulting from obsolete inventory. Smaller investment in inventory storage space. Reduced manufacturing costs as a result of improved coordination among departments.