Economic Order Quantity model (EOQ) and the Just-In-Time model (JIT) Essay

1.0 INTRODUCTIONIt is genuinely eventful that successful enterprises pack cost-effective live shopworn take hold focus, especi eithery in manufacturing companies and sell distri thation. In air practice, we usu all(prenominal)y affair umpteen credit line harbour puts much(prenominal) as the economical redact quantity sit (EOQ) and Just-In-Time molding (JIT). The purpose of this cover up is to indicate the principle of EOQ and JIT sit downs and detailed to rationalize the effectiveness in practice of the dickens role instances. Moreover, I decided to take the McDonald troupe as an example, which illust stray JIT get is organismness employ by McDonald troupe.In this report, by serious study and literature review, soak up with refer to relevant books, search reclaimable information from inter pull in and my personal idea. I realise examined concepts of EOQ and JIT moulds. Fol deplorableed by discuss the rationale of them, and illust estimate effectivene ss of the dickens standards in practice that we may in full hear the importance of EOQ and JIT carcasss in caller-outs effortless motion. Finally, practice JIT administration in McDonald bon ton is presented.2.0 THE ECONOMIC ORDER sum of money MODEL AND JUST-IN-TIME MODEL2.1 Definition2.1.1 economical Order Quantity ensampleThe Economic Order Quantity stock control model withal called the economic fate size or economic occupation quantity, it affirms that the optimal quantity of an chronicle addressedness to hal depressed at any succession is that quantity that minimizes hire stock certificate speak to over planning period (Horne and Wachowicz 1995, p.271).2.1.2 Just-In-Time modelThe Just-In-Time stock control model is an combine set of activities designed to achieve steep-volume cropion using minimal inventories of b ar-ass solids, work-in- exhibit, and blameless goods (Aquilano et al. 2004, p.426).3.0 THE BASIC ECONOMIC ORDER measuring rod MODELIn 1913, F. W. Harris developed an EOQ model which has been applied widely. This model is being employ in planning the purchase b argon-assed signifi lotts, and suppliers, and in planning purchases for wholesalers and retailers who resell mathematical mathematical proceedss.3.1 Assumptions of EOQ moldIt is requisite to the stemma anxiety that EOQ model is one of the more or less commonly approach. manipulation this model is sex actly simple, however, according to Heizer and m new(prenominal) (2001, p.481), it essential smalld on the pursual assumptions or conditionsRate of take on is eonian, cognize and independent.Lead condemnation is certainty and constant, thitherfore, when the stock down to zero, the stock could be added at a precise clipping.Quantity discounts atomic number 18 impossible.The stock is immediate and complete.If put uped goods ar in appropriate cadence, shortages tush be prevent.Setup hail and belongings or carrying follow atomic numb er 18 belong to uncertain be.3.2 The Objective of EOQ illustrationThe objective of the EOQ model is to de vergeine the optimal quantity of caudex to fellowship and the best cadence to twist the order (Dyclcman et al. 1990, p.630). In fact, the EOQ is balancing two stemma focal point be carrying embody and enjoin damage. Dyclcman et al. argue (1990) Carrying approachs take reveal-of-pocket cost such(prenominal) as storage, insurance, taxes and so on. Opport unit of measurementy cost is link to the cost of investing enceinte in stock certificate rather than in separate income-producing summations. Ordering be embarrass out-pf-pocket expenditures incurred either time an order is situated, such as handling, shipping, and so on.Dyclcman et al. (1990) trace a foster statement Carrying costs and tell costs demonstrate different cost behaviors relative to the level of stemma maintained. Carrying costs add with the quantity of stocktaking maintained orderi ng costs decrease with the quantity of stock-taking maintained. The more than chronicle kept on hand, the more storage, handling, and different such carrying costs argon incurred. The monolithicr the amount of take stock, the fewer number of orders quest to replenish the inventory and the splendider the amount of ordering costs.3.3 daring of the assumptions and model robustnessAlthough the assumption of EOQ model shows highly restrictive, one advantage of EOQ model is that it is quite robust. As mentioned onwards, there be rough assumptions forget be dropped, want no quantity discounts, no shortages, no uncertainty in melt and lead time. On the other(a) hand, such as a constant demand rate and a constant property cost per unit, fanny be violated sanely without unattackablely reducing the accuracy of the event (Martinich 1997, p. 671). When the demand face seasonal changes, model rotter be changed to adapt to this feature.Martinich (1997) utter clearly The i mportant feature of EOQ model is that the function of total stocking cost is level around the optimal order quantity. Estimating ordering cost per unit time and retentivity cost per unit time ar truly crucial, beca apply they be non often in truth accurate. so, the value computed for EOQ basin non equalthe unbent optimal value. However, beca lend oneself of the flatness of the total stocking cost function, even if the computed EOQ is 20%-30% different from the true optimal, the cost penalty is relatively small(Martinich 1997, p.671).Robust is defined as a model that gives satisfactory answers even with substantial variation in its parameters (Heizer and Render 2001, p.486). As we mentioned above, it is difficult to decide accurate ordering costs and attribute costs for inventory management. Thus, a robust model is very favorable and rough errors do non cost us very much. This is because that the EOQ model is approximately convenient and it move accurately forecast demand, place cost, and ordering cost is limited.3.4 situated Order Point versus Fixed Order Interval PolicyEOQ model is an approach of the fixed order localise policy. According to Ellram et al. (1998, p.128) Throughout the ordering a only, as long as the EOQ model was identified, a fixed quantity go forth be ordered every time. An order is placed when inventory on hand r severallyes a predetermined minimum level prerequisite to satisfy demand during the order wheel around. An order forget be generated done the automatize inventory management governing body.Another rate policy is the fixed order time interval rule. Use this method, we may set time interval, maybe every week. on a turn down floor this method, numerous projects be bought by the kindred supplier. A weekly order may be placed to tighten up ordering costs and take advantages of purchase volume discounts and warhead consolidation.4.0 JUST-IN-TIME PRODUCTION SYSTEMAs we all know, the most effective st ock management approach is JIT outturn control outline over the past 50 years. The formation is modernly being utilize by virtually(prenominal) industries.4.1 JIT LogicFor the purpose of JIT system, it set to use minimum inventories of untoughened heartys, member of ware, and washed-up goods to achieve high output. consume is establish on the feature of products actual demand, other nothing leave behind be unwrapd. Theoretically, if an item is exchange, the market give pull a comforter in the system. This triggers an order to the factory payoff line, where a worker and soce pulls another(prenominal) unit from an upstream station in the flow to replace the unit interpreted (Aquilano et al. 2004, p.427). Then this upstream station pulls to move on upstream and back to release of raw squares. To make this pull process more smoothly, JIT lack high quality in every procedure, strong supplier births, and a very clearly demand for the nett product.4.2 Featur e of JIT exertion systemIn JIT production system, Black et al. (1996, p.842) argue that it include trio key features1). Operation of production line is based on demand-pull, as a payoff, each workstations action mechanism is subject to the approval of the demand of downriver workstations. There are many an(prenominal) approaches to use demand-pull feature, but the most common method is Kanban system which is the Japanese term for a visual memorialise or card.Under Kanban system, use a kanban card to buy the farm to authorized another operation to produce a given part of the surplus quantity. Black et al. (1996) provide an example think the fiction department of a damper manufacture receives an order for 10 mufflers. The assembly department triggers productions of the 10 metal pipes it take to make the 10 mufflers by move a kanban card to the machining department, which then swallows producing the pipes. When production is completed, the machining department cast upes the kanban card to the box containing the genial pipes and ships the package downstream to the assembly department, which starts the cycle over a pull ahead when it receives the next client order.2). Each unit including the setup time and manufacturing lead time are minimized. When a product is prepare to begin in production line, then turned into finished products, the process of the elapse of the time is cognize as manufacturing lead time. employment of demand usually produced relatively small quantities, however, as long as setup clock are small, it is cost-effective to produce product in small quantities.3). If part adjudge defective and insufficient, the production line will cease operation. Each staff should attach great importance to reducing the occurrence of such hassles like defective material split. Conversely, on a raze floor the traditional inventory management system, workers git ignore defective parts and continue to work because the inventory parts and wor k in process are huge.Hirsch et al. (1989, p.746) take a similar view, they train in similarly added an important argument that total quality control (TQC) is often realise with JIT system. All the staff have wrench quality control inspection personnel, meanwhile, if products and materials are found to be not showdown quality standard, the production line should avert operation. As long as this situation happened, it must be resolved as soon as possible. It means that workers have not impetus to ignore the breach in the early of production process stage, they had to stop their work process.4.3 JIT CostingThe primitive difference amid JIT method and other traditional methods is the treatment of the costs.According to Hirsch et al. (1989, p.746), under the traditional approach of costing, raw materials or reserves firstly get into an asset account, when they are transported. After these amounts are transferred into a work-in process account, they will be put into operation as raw materials. Then, as the materials move from process to process they pass with a serial publication of work-in-process accounts for each operation. Eventually, when the productinventory through and through work-in-process account transfer to finished product inventory account.With JIT the incoming materials are entered at cost directly into a material and work-in-process inventory account. There is no serial of work-in-process accounts for each process because there is very little work-in-process to account for. The value of material is diverted to finished product inventory account because the product has been completed.4.4 JIT acquireIn JIT buy, suppliers use the replacement principle of Kanban by using small, standard-size containers and make nigh(prenominal) shipments daily to each node. JIT not only reduces in-process inventories by using Kanban, but also raw materials inventories are reduced by applying the same principles to suppliers as considerably.According to Frazier and Gaither (2001) the elements of JIT purchasing are as following1). Supplier victimization and supplier relations undergo central changes. The nature of the relationships between customers and suppliers shifts from being adversarial to being cooperative. The Japanese call these relationships subcontractor networks and refer to suppliers as co-producers.2). Purchasing departments develop long-term relationships with suppliers. The pass on is long-term supply contracts with a few suppliers rather than short-term supply contracts with many suppliers.3). Although price is very important, delivery schedules, product quality, and mutual consecrate and cooperation become the primal basis of supplier selection.4). Suppliers are promote to extend JIT approach to their own suppliers.5). Suppliers are ordinarily located near the purchasing firms factory, or if they are some distance from the factory, they are often clustered together. This causes lead times to be shorter an d more reliable.6). Shipments are delivered to the customers production line directly. Because suppliers are encourage to produce and supply parts at a steady rate that matches the use rate of the buying firm, familiarity-owned hauling equipment tends to be takered.7). Parts are delivered in small, standard-size containers with a minimum of written reportwork and in exact quantities.8). Delivered material is of near-perfect quality. Because suppliers have a long-term relationship with the buying firms and because parts are delivered in small lot sizes, the quality of purchased materials tends to be higher.5.0 THE EFFECTIVENESS OF EOQ MODEL IN intrust5.1 Examination of EOQ AssumptionsIn the practice of affair arena, although EOQ model enable to generate many good results, many limitations of EOQ model is have with its own assumptions. Schroeder (1993, p.592) argued as following1). In practice, demand is faux to be constant, but in many cases demand is shifty.2). The unit cost is assumed constant, in practice, however, normally if the purchase of macroscopical quantities, it will gain quantities discounts. This case exacts a read reasonablement of the basic EOQ model and is treated in the chapter supplement.3). The material in the lot is assumed to arrive all at once, but in some cases material will be placed in inventory continually as it is produced. This case is also treated in the supplement.4). A mavin product is assumed, however, sometimes several projects were purchased through a single provider. Meanwhile they are being shipped at one time.5). estimate the setup cost is static, as a matter of fact, it is always decreased.These assumptions have been pointed out to illustrate the limitation of the basic EOQ model, heretofore it is useful approximation in practice. The manifestation at least puts you in the parking area, provided the assumptions are reasonably accurate. In addition, the total-cost wriggle is rather flat in the arena of th e minimum. Therefore the EOQ can be familiarized somewhat to conform to reality without greatly affecting the costs.The EOQ formula can also offer insight into economic behavior of inventories. For example, traditional employee turnover arguments suggest that inventory should subjoin directly with gross gross sales if a constant turnover ratio is desired. Since turnover is the ratio of sales to inventory, a look-alike of sales will allow a doubling of inventory if the turnover rate is held constant. But the EOQ formula suggests that inventory should append only with the square root of sales. This indicates that it is net economical to maintain a constant turnover ratio as sales increase a higher turnover is indeed justified.It is important for financial private instructor that fully understand limitations and assumptions of the EOQ model will offer a strong base of making stock management decision.5.2 EOQ Model ExtensionObviously, through the above discussion, some assumptio ns of EOQ model are impractical. In order to make this model more useful, it is necessary to extension for EOQ model. Besley and Brigham (2005, pp.602-603) state clearlyTo begin with, if there is a delay between the time inventory is ordered andwhen it is received, the corporation have to reorder before it use up inventory. To avoid this, the firm can carry safety stock, which means excess inventory carried to guard against unexpected changes in sales rates or production/shipping delays.The amount of safety stock a company holds generally increase with a) the uncertainty of demand forecasts, b) the costs (in term of lost sales and lost goodwill) that result from stockouts, and c) the chances that delay will occur in receiving shipments. The amounts of safety stock decreases as the cost of carrying this additional inventory increase. Moreover, a company should consider when determining appropriate inventory level is whether its supplier provides discounts to purchase large quantitie s.It is delusive to suppose that the demand for the inventory is uniform in the year, theEOQ model should not be based on an one-year to applying. More appropriate approach should take off the year into the seasons like the spring, the summer, the fall, and the winter which sales are relatively constant then the EOQ model can be applied separately to each periods.6.0 THE EFFECTIVENESS OF JIT IN PRACTICEIn practice, we have already found that JIT system have its potence benefits and its problems. It is important to use that fully apprehension the merits and the problems of JIT system.6.1 Typical Benefits of JITMeredith and Shafer (2002, p.351) deem that JIT provide discordant advantage in real operationCost savings. There are many approaches to save cost. Such as inventory reduction, reduced scrap, less defect, less space, fewer changes due to both customers and engineering, decreased prod hours, less rework, reduced rework, and other such effects. Total savings range in the neighborhood of20 to 25 percent, with importantly higher savings on unmarried categories such as inventory and defects. tax income increases. Through high-quality product and satisfactory improvement to customers, revenue will be increased. abruptly lead time and fastly state to meet customers need lead to violate margins and higher sales. The rapid research and development of new products and aid will bring more revenues. investment savings. Investment is saved through three primary effects. initiatory, less space is needed for the same capacity. Second, inventory is reduced to the point that turns run about 50 to one hundred a year. Third, the volume of work produced in the same facility is significantly increased, often by as much as 100 percent.Workforce improvement. JIT companys employees are more satisfied with their work. They prefer the teamwork it demands, and they like the fact the fewer problems arise. They are also better trained for the flexibleness and skills needed with JIT, and they enjoy the growth they implement in their jobs. All this translates into better, more fur-bearing work.Uncovering problems. One of the unexpected benefits is the great visibility to problems that JIT allows, if management is willing to trespass on the chance to fix these problems. In trying to speed up a process, all types of difficulties are uncovered and most of them are various from of waste so not only is response time but also is usually zero.6.2 authorisation Problems in Implementing JITIt is important that JIT system has some problems and limitations. According to Meredith and Shafer (2002, p.353), there are some difficulties and problems as followingFirst of all, JIT system is do for repetitive production case, including relatively standard products. It does not applicable to custom, continuousflow, or project situation. JIT system is not long-term trading operations, because it is based on the undistinguishable mixed-model plans to operation in every day. Clearly, when setups need to spend a long time, JIT will not able to run continuously. JIT system often has setups, it also has frequent shipments and receipts. Therefore the company must be active for this too.JIT need principle as well. business will cease, once products are not arrive on schedule, or flaws happen. Moreover, we have no other means or time to make up for mistakes. Production system must be used correctly, workers must fulfill their work seriously, otherwise run of JIT system will fail. formula is usually linked with supply chain. The biggest problem to successful operation of JIT system is unrealistic deliveries from suppliers. For example Suppose X companys two important suppliers have already gone strike for several days, X company was forced to close 10 of its plants at a cost of almost $500 million in lost profits. When an important supplier their supply, JIT is very danger if there is no supporting supplier.In addition, equally serious proble m is when a comprehensive delivery aid goes on strike, like UPS and FEDEX strike that idled thousands of business and caused a major disruption in the economy. Although other delivery renovation can sometimes fill in, they often cannot bring sufficient capacity to the problem to forestall JIT operating without disruption.On the other hand, JIT is based on cooperation and trust among workers, managers, suppliers, customers, and so on. The current environment must be trust and competition is not exist, or else JIT will not run successfully. Trust and cooperation must also be extended to the extraneous such as suppliers and customers. With suppliers, this means paltry to risky, single-source contracts and bringing an outsider into the project team, where there may be proprietary secrets.6.3 E-Commerce and JIT PurchasingNowadays, JIT system combined with e-commerce, making the JIT purchasing hasbecome better to use in practice. E-commerce has already put up a advantage to JIT purcha sing. There are some merits being showed Reduce waste of time to deal with paper work and reduce the procurement lead time constancy costs are also reduced. The low animation line is a more efficient and effective purchasing process (Frazier and Gaither 2001, p.477).E-commerce can repulse the use of Kanban between maker and suppliers. Under method of Internet-based system, a manufacturer can electronically send Kanban to suppliers. E-Kanban and paper Kanban have identical functions, however they can provided to suppliers rapidly.7.0 JIT SYSTEM IN MCDONALD COMPANYWhat are the benefits for McDonald?The major benefits for McDonald are better fare at a lower cost. McDonald Company has found something that allows them to improve quality and lower costs.Improved QualityThe less unequivocal benefit is the higher quality customer service that arises from the JIT burger assembly. When McDonald waits for you to order the burger, they do a few things to improve customer service. First o f all, when you place a special order, it does not send McDonalds into a panic attack that causes huge delays.Now that McDonald company is in the practice of waiting until you order a burger until they make it, they dont crackpot out when they have to make a special order fresh just for you. This higher quality customer service is subject to McDonald mogul to produce faster. Without this efficacy, McDonalds ordering costs would be sky-high because the costs associated with ordering would be the tone ending of customers tired of ordering fast food that really isnt fast.Second, JIT allows McDonald to adapt to demand a little bit better. Seemingly, lower inventory levels would cause McDonalds bigger problems in a higher demand because they wouldnt have their safety stock. However, because they can produce burgers in a record time, they dont have to absorb about their pre-made burger inventories running out in the middle of an exceptionally busy shift. cut Costs In McDonald, the holding costs for burger parts ( kicking, cheese, whatever other drivel they put on their burgers) are pretty high because of their spoilage costs. Frozen footing beef thats good directly might not be so good in a few months. Once cooked, the same ground beefs spoilage rate shoots through the roof. Instead of having a shelf life of months or weeks, the burger need to be sold within 15 minutes or so. The holding costs go from roughly 20% per week to 100% per hour.why use JIT?According to argument of lineage management review (2005)Economic Order Quantity Savings A large benefit of JIT is that it reduces the total cost of ordering and holding inventory. High holding costs is the nature of the fast food industry. JIT system allowed them to exploit the savings that were realized by holding less inventory.High holding costs and low ordering costs are the factors that drive JIT. Generally, its the ability to lower ordering costs that make it a feasible resultant role. McDonald was slave to the high holding costs. It was just the nature of their industry. The solution for them was that while they couldnt lower holding costs, they could lower ordering costs.EOQ determines how much you should order and there are two factors that drive economic order quantities down low ordering costs and high holding costs. Depending on the product and the industry, one or both of these qualities may exist in your operations. If they do, JIT may be right for you. Without the ability to make ordering costs low as a percentage of holding costs,then there is no need for JIT. In fact, the increased frequency in ordering will result in cost increases.Safety Stock ReductionsThe other aspect of JIT is the drastic reduction in safety stock. Two reasons result in safety stock exist variableness in demand and variability in lead times from suppliers (for McDonald company, the supplier is the innate production process). If lead time is shorter, which JIT tries to accomplish, then this pa rt of the safety stock is smaller, this grueling safety stock inventory. McDonald company is carry out this by creating a system that allowed a faster burger production (McDonalds lead times are internal).On the other hand, If lead time has no section or is reduced, then this term can be eliminated or at least reduced. Again, this is what JIT try to accomplish. McDonald company is accomplished by standardizing production.McDonald Company fully understand that a considerable amount of work needs to be done with suppliers/internal operations in order to accomplish the tasks of bring down lead times and reducing their variances. McDonald company has the resource to implement JIT system successfully.However, in competitive industries, JIT is not optimal for all the firms. JIT, like most management story techniques, is not a universal panacea, and some firms find it profitable like McDonald, Walmart, and so on some are not.8.0 endpointIt should be said that stock management is prom inent aspect of working capital management. For the purpose of control stock level, most of companies use EOQ and JIT models in practice. Efficiency gains in inventory management can bring significant improvement to overall company financial performance. However, no model has been fully satisfactory. The two models have advantages and disadvantages respectively. In general, although eachmodel will work well in certain environments, they may not work well in other environments. An inappropriate choice of system can be expensive mistake. Thus, it can be concluded that each company should choose own different stock control model with its own conditions and efficient inventory management can lead to better planning and business control.LIST OF recognitionEric Smith, Joseph G. Louderback III, and Maurice. Hirsch 1989, _Cost method of accounting in Australia Accumulation, Analysis, and Use_, Published by doubting Thomas Nelson, p.746.Richard B. Chase, F. Robert Jacobs, and Nicholas J. 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