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Farzaneh Fazel: Illinois State University, Normal, Illinois, USA
Introduction
Manufacturing companies that use economic order quantity (EOQ) purchasing, either classical EOQ model or a variation thereof, increasingly are faced with the decision of whether or not to switch to the just-in-time (JIT) purchasing policy. This is a complex decision, requiring careful examination of each system and its possible impact on a variety of factors, such as cost, quality, and flexibility of the operations. This creates a need for a comparative analysis of these two popular inventory management practices, and an examination of the many factors that enter in such a decision. Quantifying and comparing the costs of these models should be an integral part of such an analysis.
Just-in-time is one of the most celebrated modern manufacturing techniques and its use has helped many firms in becoming more productive and competitive. JIT is designed to virtually eliminate the need to hold items in inventory. It is defined as: "to produce and deliver finished goods just in time to be sold, sub-assemblies just in time to be assembled into goods, and purchased materials just in time to be transformed into fabricated parts" (Schonberger, 1982). However, the benefits associated with JIT generally surpass the mere savings in inventory holding costs. A well implemented JIT system will also result in improved quality, lower manufacturing costs, lower ordering costs, elimination of waste, streamlining of the production process, and the elimination of production process bottlenecks (Rao and Scheraga, 1988). Most JIT companies view JIT purchasing as a significant component of their JIT implementation and a major factor in their success (Billesbach et al., 1991).
Despite the impressive success of JIT programmes, many companies still use the traditional approach to determine their purchase orders. This is particularly true for small manufacturing firms who cannot effectively implement JIT purchasing (Temponi, 1995). The traditional inventory management practices centre around the economic order quantity model which focuses on minimizing the inventory costs rather than on minimizing the inventory (Johnson and Stice, 1993).
According to the EOQ model, a manufacturer places several orders to its suppliers every year, with the size of each order (order quantity) being enough to satisfy the production demand for a certain period of time. For this model, the most economical...