Discuss the Economic Order Quantity model (EOQ) and the Just-In-Time model (JIT), and identify the effectiveness of the two models.

Topics: Economic order quantity, Inventory, Management Pages: 19 (4656 words) Published: October 22, 2007
EXECUTIVE SUMMARY

It is very important that successful enterprises need efficient stock control management. In reality, we usually use many stock control models such as the Economic Order Quantity model (EOQ) and Just-In-Time model (JIT). Efficiency gains in inventory management can bring significant improvement to overall company financial performance. In this report, rationale of the two models, effectiveness of the two models in practice, and use JIT system in McDonald company will be presented.

Our conclusion that EOQ and JIT models like most management accounting techniques, are not a universal panacea and 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.

TABLE OF CONTENTS

page

EXECUTIVE SUMMARY 1

TABLE OF CONTENTS 2

1.0 INTRODUCTION 3

2.0 THE EOQ MODEL AND JIT MODEL 4

2.1 Definition 4

2.1.1 EOQ Model 4

2.1.2 JIT Model 4

3.0 THE BASIC ECONOMIC ORDER QUANTITY MODEL 4

3.1 Assumptions of EOQ Model 4

3.2 The objective of EOQ Model 5

3.3 Validity of the assumptions and model robustness 5

3.4 Fixed Order Point versus Fixed Order Interval Policy 6

4.0 JUST-IN-TIME PRODUCTION SYSTEM 6

4.1 JIT Logic 7

4.2 Features of JIT production system 7

4.3 JIT Costing 8

4.4 JIT Purchasing 9

5.0 THE EFFECTIVENESS OF EOQ MODEL IN PRACTICE 10

5.1 Examination of EOQ assumptions 10

5.2 EOQ Extension 11

6.0 THE EFFECTIVENESS OF JIT MODEL IN PRACTICE 12

6.1 Typical benefit of JIT 12

6.2 Potential problems in implementing JIT 13

6.3 E-commerce and JIT purchasing 14

7.0 JIT SYSTEM IN MCDONALD COMPANY 14

8.0 CONCLUSION 18

LIST OF REFERENCE 19

1.0 INTRODUCTION

It is very important that successful enterprises need efficient stock control management, especially in manufacturing companies and retail distribution. In business practice, we usually use many stock control models such as the Economic Order Quantity model (EOQ) and Just-In-Time model (JIT). The purpose of this report is to indicate the rationale of EOQ and JIT models and detailed to explain the effectiveness in practice of the two models. Moreover, I decided to take the McDonald company as an example, which illustrate JIT model is being applied by McDonald company.

In this report, by serious study and literature review, combined with refer to relevant books, search useful information from internet and my personal idea. I have examined concepts of EOQ and JIT models. Followed by discuss the rationale of them, and illustrate effectiveness of the two models in practice that we may fully understand the importance of EOQ and JIT systems in company's daily operation. Finally, use JIT system in McDonald Company is presented.

2.0 THE ECONOMIC ORDER QUANTITY MODEL AND JUST-IN-TIME MODEL

2.1 Definition

2.1.1 Economic Order Quantity model

The Economic Order Quantity stock control model also called the economic lot size or economic production quantity, it affirms that "the optimal quantity of an inventory item to order at any time is that quantity that minimizes total inventory costs over planning period" (Horne and Wachowicz 1995, p.271).

2.1.2 Just-In-Time model

The Just-In-Time stock control model "is an integrated set of activities designed to achieve high-volume production using minimal inventories of raw materials, work-in-process, and finished goods" (Aquilano et al. 2004, p.426).

3.0 THE BASIC ECONOMIC ORDER QUANTITY MODEL

In 1913, F. W. Harris developed an EOQ model which has been applied widely. This model is being used in planning the purchase raw materials, and suppliers, and in planning purchases for wholesalers and retailers who resell products.

3.1 Assumptions of EOQ Model

It is necessary to the inventory management that EOQ model is one of the most commonly approach. Use this model is relatively simple, however, according to Heizer and...
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