Eoq Versus Just in Time JIT

Smitheford Pharmaceuticals

When it comes to inventory management, there are two basic methods that are used far more than any other structured and defined methods. Indeed, those two methods are just-in-time (JIT) and economic order quantity (EOQ). Both have their upsides and downsides but the structures of the two are notably different in what they focus on. However, the root goal of both is effective inventory management and that is a noble cause. While there is no "perfect" way to manage inventory from an ideological or mathematical perspective, it is held by many that just-in-time and economic order quantity are the two best official options out there.

Questions Answered

Basic EOQ Defined

According to Investopedia, the basic EOQ would be the square root of two times the order cost times the demand rate, all over the carrying cost per unit. Since the cost per unit is $48, the carrying cost per unit would be 48 * 0.15, which would be $7.20. In this case, the EOQ would be the square root of two times 28 times 400,000 over 7.20. This comes out to 1,763. This is the economic ordering quantity. In term of keeping costs minimized, this is the order quantity that provides the best "bang for the buck" given the demand quantity that exists and the costs required, both fixed and variable (Investopedia, 2016).

Total Cost Given a Specific EOQ

At 1,763 units, the total cost would be (1763 * 48) + $28. In other words, the per unit cost ($48) times the amount of units (1763) would show the variable cost and adding in the $28 (the fixed cost) would give the cost of the order. In this case, that would be 1764 (rounded up to the nearest unit since it was not a whole number answer) times $48 plus $28, or $84,700. This would be $48.0159 per unit (NCSU, 2016).

Total Cost at One Thousand Units

The overall cost would go down to $48,028. However, the average cost per unit would $48.028. Not a huge rise ... but a rise nonetheless (NCSU, 2016).

Differences between EOQ & JIT

They are indeed the two main ways to manage inventory. However, they are different. EOQ, as is obvious from the above, focuses on what is optimal when it comes to what is ordered at a time. Just in Time (JIT) is different in that it requires that a fixed number of units are ordered at one time. Once the proper inventory level is reached, an order for that precise amount is ordered. EOQ focuses on the per unit levels and fixed costs and how to keep inventory stocked while minimizing all of the above. JIT focuses on getting the right inventory at the right time (Difference Between, 2016).

Other Observations & Facts

As mostly noted above, just-in-time centers on the idea that goods and materials needed for manufacturing and so forth arrive on time but not too soon before. In other words, the idea is to have them on hand for when they are needed but they should be arriving just before they are need rather than having a glut of supplies and inventory that is collecting dust. The latter leads to wasted space and a lot of other costs and unnecessary efforts that can be skipped by managing inventory more efficiently and only keeping on hand what is needed in the very near future. Of course, there has to be a balance between having an item too soon and having it too late. If the item is early, it has to be moved, stored and managed until it is needed. If the item arrives too late, then the thing being manufactured will have to be delayed because the necessary parts or supplies are not on hand. A major linchpin if making this all work is making sure that the supply is reliable and constant. If there are interruptions in supply, then just-in-time may not work as planned. For example, if an item is supposed to be hand precisely three days before it is needed and a supplier is out of stock and is backordered for more than three days, then just-in-time might lead to problems. However, there are ways to adjust and to provide for contingencies (Investopedia, 2016).