Comparison Between Eoq And Jit Purchasing Policies Accounting Essay


This study will consist to advise a company on its future choices in order to improve the production and fix some difficulties such as part shortages.

Here the current company based in U.K. manufactures five types of gearboxes for helicopters made from two alloys. Considering the U.E. law the company is qualified as medium sized company with regard to the number of employee (EU recommendation, 2003).

The first part of this study will compare two management tools which have the same target in reducing ordering and holding costs.

The second part will highlight others management tools which allow finding easier system constraints such as materials resources planning (MRP), soft system methodology (SSM) and theory of constraint (TOC).

The value stream mapping bellow allows seeing the current running of the company and the major issues met with its current management, for instance part shortages and high Work In progress.

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Figure Value stream mapping of the company

Comparison between EOQ and JIT purchasing policies

This first part will consist seeing if just in time (JIT) purchasing policies can be more cost effective than Economic Order Quantity (EOQ) used by the company. To start this study a brain storming has been organised between seven people in order to discuss about weaknesses and causes which can lead to a part shortage. Results can be seen below in the Ishikawa diagram.

Figure Ishikawa diagram

Regarding this diagram many causes can be led with EOQ purchasing policies. The most common difficulties met are the holding, transportation and material prices which are not constant due to quantity discount or wrong forecasting.

Considering the possible change of purchasing policies to the just in time, it is necessary to compare these two purchasing policies and see if this new policy can fix the current company issues.

Firstly, it is important to see advantages which could be brought by just in time. Comparing this method to the economic order quantity, the major advantage is that expenses associated with maintaining a large inventory can be dramatically reduced. Therefore the company can reduce its levels of finished goods, work in progress and raw materials. Besides JIT requires a very good organization to meet the customer demands, indeed, raw materials and parts needs to be delivered just in time to produce exactly what is needed. This organization avoids the overproduction and allows decreasing production and ordering costs and increasing the quality of the finish goods. Due to the small size of orders it is easy to see defects, quality problems can be fixed before they rise to an insurmountable degree (Andrew Dubrin, 2008, p. 208). With regards to EOQ model, the high level of inventory can lead to a deterioration of products over time. So, JIT ensure a better quality.

Concerning the costs of each purchasing policies, to know which the more cost effective, different research have been carried out, notably by Fazel et al (1997) who developed a series of mathematical models to compare the cost difference between these two policies. Fazel et al (1997) showed the existence of an indifference point where the costs are the same for a level of demand (see fig. 3). Therefore beyond this point JIT inventory is not more cost effective than EOQ.

Figure Cost difference between EOQ and JIT

So, Fazel et al (1997) conclude the choice of a suitable system depends on many parameters such as delivery price, inventory holding and ordering costs and discount rates. Besides, EOQ is preferable for a higher level of demand.

In the case of this company the choice in consideration of the price is difficult. Indeed, a lot of data like delivery price, inventory holding and ordering costs are missing, so it is not viable to use mathematical model above. However Schniederjans and Cao (2000) concluded that JIT system would always be preferable to an EOQ system (Wu Min and Low Sui Pheng, 2006) if other parameters are taken in consideration for instance the cost saving caused by reducing square footage with JIT policy. Although JIT seems to be more cost effective in that case, it is preferable to consider and study other advantages like quality and flexibility.

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Respecting the flexibility, one of major advantages of JIT inventory is to make the system flexible by reducing setup time and lead time (Jae K. Shim and Joel G. Siegel, 2008, p. 240). In addition JIT also requires a flexible workforce. Indeed workers are trained to perform a wide range of jobs at very short notice (Vikas Kumar, 2010). In comparison (Mark O. George, 2010, p. 166) considers that a dimension is not taken in account in using EOQ such as enterprise speed, flexibility and responsiveness. Consequently JIT is more flexible than EOQ purchasing policy.

Regarding the quantity discount, EOQ policy is based on the fact that material and transportations prices are constant for the order quantities and the period considered. However there are often volume discount, so the price and the demand may change, but is possible to include variable in the EOQ formula (P.Marayan and Jaya Subramanian, 2008, p. 18). The different mathematical models established by Fazel et al showed that JIT is always more cost effective that EOQ even in including quantity discount.

To conclude JIT purchasing policy includes lot of advantages which could be beneficial for the company notably the fact to be more flexible, to reduce work in progress and raw materials inventory. However, JIT needs some requirements to ensure a good running of the company such as setting up Kanban pull system in order to control the production. Another inconvenient for this company is the distance between it and its suppliers which are too far, notably one based in a different continent. JIT requires working closely with suppliers in order to be delivered every day just in time with the right quantity. Therefore if the current company can’t changed of supplier, it is going to be difficult for it to implement a just in time purchasing policy.

Study of different tools, MRP, TOC and SSM

The JIT solution has not been chosen by the top management, therefore the aim of this second part is to compare different tools such as materials requirement planning (MRP), soft systems methodology (SSM) and theory of constraint (TOC) in order to suggest what type of tool would be suitable in finding system constraint.

Firstly focusing on theory of constraint (TOC), this concept is based on the existence of the constraints which are opportunities for improvement. According to Eliyahu M. Goldratt (1900), there are fives focusing step of on-going improvement listed below needed to improve the system (see fig. 4).

Figure Five focusing steps of TOC (Goldratt, 1990)

The TOC solution uses different methods to fix problems in the production line such as the drum buffer rope scheduling, constraint focused performance measurement and buffer management (Togar M. Simatupang, 2004).

There are many advantages to use this system for instance TOC is a powerful and cost effective tools. The company can increase its productivity with minimal changes to operations and without additional space or staff. Moreover quality and flexibility are increased thanks to the continuous improvement. However there are also some inconvenient such as the difficulty to apply TOC if the bottleneck is continuously moving (Michal MARTON, 2010).

Secondly, concerning material resources planning, nowadays this manufacturing tool is mainly software based. It permits ensuring that materials and products are respectively available for production or for deliveries to the customer, maintaining lowest inventory levels in store and planning manufacturing and purchasing activities and deliveries. (Rajesh Gautam, 2012).

There is an evolution of MRP called MRPII which has the advantage to take in account all aspects of the manufacturing process including materials, finances and human resources.

Gautam et al (2012) showed that MRP is a useful simulator which could bring many profits such as to decrease work in progress at each station, decrease manufacturing costs, and improve production planning, control the manufacturing process from purchase to the shipment and provide suitable priorities that reflects actual needs. Regarding the limitations, most of them are fixed with the evolution but MRPII requires high accuracy of data and a good knowledge on the product structure and routing.

Despite the high price of this software, it could be a good solution for the company. Indeed MRP reacts quickly when the demand changes, and suppliers don’t need to be based close to the company.

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Thirdly, focusing on Soft System methodology (SSM), which permits comparing model from the real world and model as it might be thought seven stages (see fig. 5) (Checkland, 1981). SSM is a learning and enquiring tool.

Figure Seven stage model of SSM (Checkland, 1981)

The main advantages of this tool are that the improvement of problem analysis, it is easier to understand and build a structure in order to fix problem situations at any stages of investigation. Moreover it provides clarity in weakness areas, and contributes to a better communication.

This methodology cannot be applied to all the problem situations. Indeed it is difficult to use this approach if the problem is not properly defined or if the analyst has not knowledge of the current working process.


The two parts of this study have given an overview of the running, benefits and limitations of each tool. With regard to Gautam et al is difficult to choose a suitable method which can meet perfectly the customer demand, decrease production and holding cost, etc...Lot of factors need to take in account such as company size, implementation costs, staff training etc...

Nevertheless, if this company needs to make a choice, I think that the most appropriate inventory management tool is material resources planning. In fact, the company seems to grow because two new types of gearboxes have been launched within past two years, so the company needs flexibility which could be brought with MRP method. Besides with the development of computer technologies, MRP can adapt and grow in same time of the company.

Secondly the company want to be perfectly coordinated in order to assembly the small parts. Strength of MRP is to schedule the production and process, therefore it can reduce work in progress and improve the coordination of these different processes.

Thirdly, the relation between suppliers, customers and the company can be manage by this tools, notably to know when is necessary to send an order or a shipment. In that case holding costs can decrease and component can be received just in time. Additionally it is easy to add a new supplier or customer in the data base.

Finally, manager can have a view on all processes, know the quantity of raw material and part in progress, indentify easily constraints of the system and take quick decision.

The main limitation to implement a MRP in this company which can be the cost of investment, this tool is particularly expensive. In addition MRP requires training to learn how to use it. It is very important to know well the running of this one and how enter data because this software is based on the accuracy of data. The company count 125 people, so it will be not too expensive and too long to train the staff.

To conclude MRP can be coupled with another management tools such as just in time or theory of constraint, consequently the company is not struggle with this choice.