COMPARISON OF EOQ

AND JIT PURCHASING

POLICIES
Guided by: SHIBIN KT
Regi Kumar CLASS NO: 423
Lecturer
S7 INDUSTRIAL
OBJECTIVE OF STUDY
Ultimate aim of this study is to expand on
two concepts namely the annual holding
capacity of an inventory facility, and the
break-even point between the annual
holding capacity of an inventory facility
and the EOQ-JIT cost indifference point,
where price discount is available for EOQ
system.

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INTRODUCTION
• Successful implementation of JIT
purchasing policy in various industries has
promoted many companies that still use
EOQ purchasing system to ponder
whether they should switch to JIT
purchasing policy.
• An EOQ-JIT cost indifference point (ie, the
level of demand at which the total cost
were same) existed between EOQ & JIT
systems.
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INTRODUCTION…

• JIT purchasing system is more

convenient than EOQ.JIT has the
advantage of physical plant
square meter reduction.
• So, is it possible for an EOQ
system to be more cost effective
than a JIT system??
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INTRODUCTION…

Schniedersans and Cao considered

“Physical Plant Space” factor in their
studies. They suggested JIT is
preferable than EOQ at any level of
demand. They failed to empirically
ascertain the capability of an
inventory facility.

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INTRODUCTION…

EOQ price discount model can be

categorized into two scenarios where
the optimal order quantity is above or
below Qmax, the maximum quantity
that can be purchased and still
receive a quantity discount rate ∏E.

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EOQ with price discount
model

TCE= KD + Qh + (PẾ - ∏E Q) D
θ 2

Total ordering cost Cost of actual

purchased unit
Total holding cost

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 TCE= KD + Qh + (PẾ - ∏E Q) D
θ 2
• PẾ = Purchase price / unit
• θ = Fixed order quantity
• K = Cost of planning an order
• D = Demand
• h = Holding cost of one unit for one year
• Qmax = Maximum quantity that can be
purchased and still receive a quantity discount
with rate ∏E.

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TCE= KD + Qh + PẾmin D

θ 2 for Q›Qmax

PẾmin = Minimum constant purchase price

Optimum order quantity Q* = √2KD/h-2∏ED

when Q*‹ Qmax

When Q*›Qmax, Q** = √2KD/h

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 Ultimate EOQ-JIT
Cost Indifference
Point
The annual demand at which the
inventory can be accommodated by
the existing inventory facility and at
which the total annual cost under the
EOQ system equals the total cost
under the JIT system.

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 Modify Schniederjans & Cao
EOQ-JIT cost indifference point.

Derivation of the function of the annual

holding capacity of an inventory facility

Derivation of the break-even point between the

annual holding capacity of an inventory facility
and the EOQ-JIT cost indifference point

Derivation of ultimate EOQ-JIT

cost indifference point.
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MODIFIY SCHNIEDERJANS & CAO
EOQ-JIT COST INDIFFERENCE
POINT.

TCE = kD √h-2∏ED/2KD +
h/2 √2KD/h-2∏ED +
(PẾ - ∏E √2KD/h-2∏ED )
K = Cost of placing an order
Substituted Q* instead of Q

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 TCJ = PJD-FN
• PJ = Unit price under JIT system
• D = Annual Demand
• F = the annual cost to own and maintain a
square meter of physical plant space.
• N = Number of square meters of physical
plant space saved by adopting a JIT
system.

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REVISED COST INDIFFERENCE POINT

• For comparison,
• Z=Total optimal annual cost under
EOQ system - Total cost under JIT
system
• Root of the above equation gives the
revised cost indifference point as:-

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Dinds= FN(PJ-PẾ) + Kh +
√k²h² + 2Kh(PJ-PẾ)FN-
4∏EKF²N²
(PJ-PẾ)² + 4∏EK

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 N= NE-NJ
NE = Square meter of an inventory facility
under EOQ system
NJ = Square meter of an inventory facility
under JIT system.

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Dinds= FNE(PJ-PẾ) + Kh +
√k²h² + 2Kh(PJ-PẾ)FNE-
4∏EKF²NE²
(PJ-PẾ)² + 4∏EK

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ANNUAL HOLDING
CAPACITY OF AN
INVENTORY FACILITY
• The number of inventory that can be
held by the inventory facility at a
specified time.
• Qh=NE/α
• NE=Number of square meters of an
inventory facility
• α=square meters occupied by unit
inventory
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• It is assumed that size of inventory facility is
b times the size which holds the optimal
order quantity:-
Qh=bQ*
• So, NE=ɑbQ*

• Since Q*<Qmax
• NE should be limited up to
ɑbQmax:-
NE<ɑbQmax
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By substituting the value of NE in
annual demand function; we will get
Dh safe = bNE²
2Kb²α² + 2∏ENE²

Di ≤ Dh Safe
Di= Cost indifference point

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BREAK EVEN POINT
1. The break even point between the
annual holding capacity of an inventory
facility & EOQ-JIT cost indifference point
is (Neq, Deq)
2. Y = Annual holding capacity of an
inventory facility - EOQ-JIT cost
indifference point.ie;Dh safe-Dind
3. Setting Y = 0. The root of the eqn will be
the break even point represented by
square meter of an inventory facility.
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4. Neq= The break-even point represented by
the square meter of an inventory facility for
order quantity below Qmax.
5. By substituting the value of Neq, value of
Deq can be foundout.
6. Deq= Break even point represented by the
annual demand of an inventory for order
quantity below Qmax.

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Ultimate EOQ-JIT Cost indifference
point for order quantity below Qmax
• NE ‹ αb Qmax
• NE ≥ Neq
• Dui = [(PJ-PẾ) FNE + Kh] +
√k²h² + 2 (PJ-PẾ) FNEKh-
4∏EKF²NE²
(PJ-PẾ)² + 4∏EK

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Order quantity above Qmax
1. Minimum purchase price PEmin will
remain constant.
2. ∏E, discount rate = 0.
3. NE › αb Qmax. Since Q* ›
Qmax

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EOQ-JIT cost indifference point
when Q*>Qmax
NE ≥ Neq** = 2 αb (⍺bF+h)
(PJ – PEmin)h
Dui** = [(PJ-PEmin) FNE + Kh] +
√2(PJ-PEmin) FNEKh+ K²h²
(PJ-PEmin)²

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SURVEY
• Survey showed that among all the RMC
suppliers surveyed ; approximately 60% of
them purchased cement using the JIT
system.
• Because their demand volume was too low ,
ordering cost were high.
• 40% of the users were engaged in cement
business. so their demand volume was
high.

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CASE STUDY DATAS
• Q max= 10000 tones
• Order quantity = 40000 tones/order
• Q**= 35829 tones
• NE= 5600 meter square
• Neq= 5016meter square
• Deq= 476930 tones
• Dui**= 480646 tones

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1. Since,NE>Neq;
Dui**>Deq
EOQ IS PREFFERED

2. Routine order quantity = 40000 tons/order.

Capacity of carrier in JIT System = 1500
tons.
EOQ IS PREFFERED

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Conclusion of
CASE STUDY & SURVEY
• The selling price of a product will usually
drop during an economic slump , thus
causing the JIT companies into liquidation.
• EOQ companies can still make profit from
selling raw materials.
• EOQ companies can supply raw materials to
the small and medium sized JIT companies
and can control the market price to some
extent.

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• It is better for larger companies whose
inventory ordering sizes can’t be
economically split to adapt EOQ system of
smaller and medium size companies to
adapt JIT system.

• By adopting JIT system smaller companies

can operate faster, eliminate waste,
maintenance of large storage facilities.

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 CONCLUSION
• Analysis showed that, if the order quantity is
below Qmax, it is possible for an EOQ
system to be more cost effective than a JIT
system, if the break even point Neq is less
than αbQmax.
• If the ordering quantity is above Qmax,
EOQ system is more cost effective,
when the annual demand reaches the
demand at break even point.
• So EOQ can be more cost effective
than JIT system.
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REFERENCES
• Wu Min, “EOQ, JIT and fixed costs in the ready-mixed
concrete industry”, Int. J. Production Economics, Vol 2,
No. 4, 2006, pp. 167–180.
• Cao, Q., Schniederjans, M.J., 2004. “A revised
EMQ/JIT production-run model: An examination of
inventory and production costs”. International Journal
of Production Economics 87 (1), 83–95.
• Marc J. Schniederjans, “A note on JIT purchasing vs.
EOQ with a price discount: An expansion of inventory
costs.
• www.sciencedirect.com
• www.google.in

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