EOQ vs JIT
Inventory is the number of stocks held by a business or company and is considered an asset. Good inventory management is key to a company’s achieving its goal of meeting customer demands and having high profitability. There are two ways of managing inventory, EOQ and JIT.
Economic Order Quantity (EOQ) is the amount or size of inventory that is ordered at one time which minimizes the ordering and annual inventory costs. It aims at maintaining the amount of materials at a desired level at a minimum cost.
The inventory level is closely monitored, and a fixed number of units are set so that each time that it reaches its reorder level, the exact quantity is ordered. It is applied especially if there is continuous demand for the product, and the new order is delivered in full.
It is utilized under the following assumptions: that the demand for the product and the ordering costs are constant, and that the inventory is exhausted at a fixed rate and a fixed number of units must replenish it to its starting level.
Because stocks are replenished immediately, there are no shortages and no extra costs. It minimizes the holding costs and the order costs and uses this equation:
S – cost of placing an order
D – demand rate
P – cost of production
I – Interest rate (risk-free)
Just-in-Time (JIT) is a Japanese management philosophy which focuses on providing customers with stocks at the right time and with the right stock quality and quantity. It aims at reducing in-process inventory and carrying costs and maximizing profits at the same time.
It was created by Taiichi Ohno, a Toyota executive, who is the father of JIT or Lean Manufacturing. It was developed as a way for the company to meet its customers’ demands on time and with minimum time, resource, and material wastes.
JIT offers the following benefits:
Reduced setup time.
Improved the flow of goods from warehouse to shelves.
Efficient use of the employees’ skills.
Synchronization of production schedules and work hours.
Strengthens relationship with suppliers.
Regular replenishment of supplies.
It is most effective when the following Japanese work ethics are applied: high motivation and striving to attain the highest standard possible, sharing of skills, ideas, and talents to accomplish a collective goal, putting work over leisure, and loyalty to the company.
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.