ABSTRACT:The successful implementation of just-in-time (JIT) purchasing policy inmany industries has prompted many companies that still use the economic orderquantity (EOQ) purchasing policy to ponder if they should switch to the JITpurchasing policy. Despite existing studies that directly compare the costsbetween the EOQ and JIT purchasing systems, this decision is, however, stilldifficult to be made, especially when price discount has to be considered. JITpurchasing may not always be successful even though plants that adopted JIToperations have experienced or can take advantage of physical space reduction. Hencethe objective of this study is to expand on a classical EOQ with a pricediscount model to derive the EOQ-JIT cost indifference point. The objective wastested and achieved through a survey and case study conducted in theready-mixed concrete industry in
Key words: EOQ-JITcost indifference point, Price discount, Inventory facility, Ready-mixedconcrete
1. INTRODUCTION
The successfulimplementation of just-in-time (JIT) purchasing policy in various industrieshas prompted many companies that still use the economic order quantity (EOQ)purchasing system to ponder whether they should switch to the JIT purchasingpolicy [1-8]. This decision is, however, a difficult one, especially when price discount has to beconsidered. To help these companies make an informed decision, Fazel,Fischer and Gilbert [9] developed a series of innovative mathematical models todirectly compare the costs between the EOQ with a price discount purchasingsystem and the JIT purchasing system. While omitting the “fixed costs” such asrental, utilities and personnel salaries from the cost difference functionbetween the EOQ and JIT system, Fazel, Fischer and Gilbert [9] suggested thatalthough the choice of either the EOQ or the JIT system depends on manyparameters, an EOQ-JIT cost indifference point (i.e. the level of demand atwhich the costs were the same) existed between the EOQ system and the JITpurchasing system. Beyond theindifference point, JIT inventory purchasing was not preferred. Fazel, Fischerand Gilbert [9] further suggested that JIT was only preferred when demand waslow. In a recent paper, Schniederjans and Cao [10] argued that those “fixedcosts” items were not fixed and thus should not be left out from the EOQ-JITcost difference function. Schniederjans and Cao [10] suggested that insituations where plants adopting the JIT operations experienced or could takeadvantage of physical plant space square meter reduction, to include one singlecost item, namely, the physical plant space factor, into the EOQ-JIT costdifference function would substantially increase the EOQ-JIT indifferencepoint. Schniederjansand Cao [10, p.294] also suggested that there was a “threshold point” for anexisting physical plant. The existing physical plantspace thus might not be able to hold the substantially increased indifferencepoint’s amount of inventory. Hence, additional physical plant space had to bepurchased when demand increased. The purchase of additional plant space wouldagain provide one more opportunity for a further round of JIT square foot costreduction [10].Schniederjans and Cao [10] then suggested that“… thedynamic nature of a JIT system should continuously achieve a cost advantageover an EOQ system …” andthe scenario “… is much like a cat trying to catch its tail …” [10,p.294], Schniederjans and Cao [10, p.294]therefore concluded that “… a JIT ordering system is preferable to an EOQsystem at any level of annual demand and with almost any cost structure.”Schniederjans and Cao [10] also demonstrated their argument by analyzing anexample, albeit, a figurative one.
JIT purchasing is not always successful.Many companies are still using the EOQ based inventory ordering system topurchase their raw materials. This is despite the fact that the plants adoptingJIT operations may experience or can take advantage of square footage reduction[8].Fazel,Fischer and Gilbert’s [9]models appear to beunable to clearly explain the wide adoption of the JIT policy in manycompanies. Likewise, Schniederjansand Cao’s [10] models seem to be unable to clearly explain the success achievedby the EOQ companies. This suggests that the real EOQ-JIT cost indifferencepoint has not yet been derived. One possible reason is that the EOQ with aprice discount model, from which Fazel, Fischer and Gilbert[9] andSchniederjans and Cao [10] developed their EOQ-JIT cost difference functions,was based on Harris’ [11] EOQ model. In Harris’ [11] EOQ model, namely theclassical EOQ model, some inventory operating costswere assumed to be “fixed”.This EOQ with a price discount model, which incorporated the classicalEOQ model and a price discount scheme proposed by Fazel, Fischer and Gilbert [9],is referred to as the classical EOQ with a price discount model in this study. Hence the purpose of this study is to expand the classical EOQ witha price discount model to include those inventory operating costs that wereleft out. This is to derive the formula of the real EOQ-JIT cost indifferencepoint, called the revised EOQ-JIT cost indifference point, as an extension ofFazel,Fischer andGilbert’s [9]and Schniederjans and Cao’s [10] works.This would be developed and tested through a survey and case studyconducted in the ready-mixed concrete industry in