OM523-Group 9 Random Thoughts: Thoughts

“Traditional inventory management techniques may underemphasize the costs of maintaining large inventories. JIT may under-emphasize the costs of not maintaining inventories, particularly since such costs are often difficult to identify and measure”

“Most manufacturers ignore some relevant and important costs associated with carrying inventory, and thus do not calculate EOQ lot sizes correctly. He argues that correct usage of the EOQ model will result in lot sizes that closely approximate JIT lot sizes”

The two quotes above stood out to me as I read the article comparing the costs of EOQ to JIT purchasing. EOQ purchasing means optimizing inventory levels based on minimizing costs even if that results in having a lot of inventories on hand. Using EOQ we assume that the holding cost we use to find the optimal order quantity will keep a natural balance since we are trying to minimize our costs. JIT purchasing is of the idea that the minimal amount of inventory necessary is the optimal quantity and of course minimal inventory will reduce costs. The article is of the idea that if costs are calculated correctly for the EOQ model then it will find the lowest amount of inventory to be the optimal order quantity which is an overlap of the EOQ model and JIT.

The article also states that the amount of annual demand has a significant effect on the total cost associated with the purchasing models when used separately. I found the graph below (similar to the graph in the article) which shows how annual demand is influenced by the difference between total cost for EOQ and JIT. The consensus is that for lower annual demand JIT would be best and for higher annual demand the EOQ model does the best to minimize costs. I think the main point of the article is that for the EOQ model to be most effective the calculations of holding and setup costs should be extremely thorough and if done correctly it will return the lowest optimal order quantity (imitating JIT) for the lowest total cost.