Effects of Lower Oil Prices

As we have seen over the past several weeks, the price of oil has considerably dropped to levels that we have not seen in the past several years. Many say that the lower prices are a result of lower demand levels caused by the economic condition that our economy is going through. With the lower prices for oil, comes benefits for companies that have to distribute their products. These lower oil prices help lower transportation costs. The possible savings from lower transportation costs could be used in other areas of the company in an attempt to find better ways for their supply chain to lower the amounts of inventory on hand while at the same time increasing the level of service offered to the customer. This could be done through investing in new technology or through more extensive R&D. By lowering inventory levels, a company can gain even further cost savings that will help them in a time when prices of products is one of the main factors that goes into the buying process for customers. With lower amounts of spendable income, customers are more than ever price conscious. I hope that this provided you with an insight on how lower transportation costs could ultimately help with finding new ways of lowering inventory levels throughout the entire value chain.

"EOQ and EPQ with linear and fixed backorder costs"

I have to agree with Mark. This article is very hard to follow and very theoretical. I'm sure the authors had good intentions when attempting to explain the algebraic equations for EOQ and EPQ with backorder costs, but I got lost in all the equations and notations throughout the article. However, I did gain from the article that there is a case when backorders are too expensive and there is a case when backorders are attractive, and these cases are rather similar for both EOQ and EPQ. (The equations are listed in the article.) I appreciate the simpler algebraic equations for this analysis, but I do not think I'll have much use for proving these formulas in my career.

Laura Sitko

"A comparative analysis of inventory costs of JIT and EOQ purchasing"

I think that this article was very informative. With "lean manufacturing" so popular, many companies these days implement JIT inventory systems, and I think that this article did a good job of pointing out that JIT might not always be the optimal choice for all companies.

Using the JIT system, many costs can be eliminated, such as storage, capital, insurance, ordering, and transportation costs. If every company and their suppliers used JIT, JIT would be the optimal choice for inventory every time. However, because we do not live in an ideal world, suppliers typically hold inventory. This could be due to a number of factors, such as procurement of materials overseas, or perhaps they are afraid of stock-outs and being charged by the company (as is the case in auto-manufacturing), etc. Therefore, many costs are hidden in the purchase price for companies that use JIT. According to the article, this results in an annual demand level at which JIT is no longer the preferred method; thus, making EOQ the optimal choice at that level.

I think it is very important to evaulate each situation in order to determine whether JIT is actually the preferred method. This article even suggests using a mixed method of both JIT and EOQ, and I have to agree. While JIT is certainly a good choice for some, it is not suited for all.

Laura Sitko

Backordering Article

I think this article was very hard to comprehend. I think it was too heavy on the math portion and the explanation seemed confusing. I realize that it basically used an algebraic approach to analyze whether allowing back ordering or not is the optimal policy. The author used an algebraic model to calculate whether a fixed backordering cost was large enough that using backordering at all would be too cost prohibitive, as in whether it was larger than the average? EOQ cost.

Mark Brislin

JIT or EOQ?

The research article on JIT and EOQ makes the case that there is no clear cut preferred option between EOQ and JIT systems. In fact, the determination of which system to use is entirely related to the specific situation.

According to the article, there are a variety of factors that influence which system is best. JIT relies on the reduction of ordering costs as well as holding costs to be more profitable. While the EOQ system relies on minimizing and balancing ordering and holding costs to achieve the most profitable system. As stated in the article, in a comparison of JIT and EOQ, Johnson and Stice (1993) conclude that “traditional inventory management techniques may underemphasize the costs of maintaining large inventories. JIT may under-emphasize the costs of not maintaining inventories, particularly since such costs are often difficult to identify and measure”.

As stated in the article, Under the JIT system, much of the holding costs and some components of the ordering costs can be significantly reduced or eliminated. Other costs such as transportation and inspection costs can be reduced by having the suppliers locate near the buyer’s plant or by improving the quality at the suppliers’ facilities.

However, The remaining costs associated with holding or ordering items (e.g. storage, inspection, or transportation costs that have not been eliminated) are transferred to suppliers and are in turn charged indirectly to the buyer as a part of the purchase price. The purchase price change is a problem with the JIT system, because if the purchase price increases as a result of the new system, it might very well cost you more than the savings you will make as a result of using JIT.

The manufacturer will be holding less inventory, but as the article states the suppliers usually begin to hold larger inventories and just ship smaller amounts to handle the JIT system. This results in more inventory costs for the supplier which eventually are passed on to the manufacturer in the form of increased prices as described previously.

This means demand becomes a critical part of the equation, as demand increases you are going to be losing more money to the purchase price increase factor. So at some breakeven amount of demand, EOQ will become the more profitable system. However, if the use of JIT allows the supplier to deliver at a cheaper cost than they would using EOQ, then JIT is definitely the preferred system.

There are also the other two factors of holding and ordering costs that can change the profitability of the systems. If either holding or ordering costs are particularly high then JIT becomes the correct choice as it will reduce alot of your costs as inventory is usually reduced in some amount as well as ordering costs going down due to closer suppliers and less transportation costs. Since the costs were high originally, these gains should be large enough to insure less costs than EOQ.

The article goes on to describe a mathematical model that can be used to determine the profitability of one system over the other based on ordering cost, demand, holding cost, and purchasing cost. You can solve for a breakeven demand at which EOQ becomes more profitable than JIT and at what demand amount JIT is most profitable.


Mark Brislin

"A Comparative Analysis of Inventory Costs of JIT and EOQ Purchasing"

This reading is a very interesting and educational article due to the fact that we are going through a period in which eliminating costs is extremely important for the productivity of businesses. The basis of this article is to alert the reader as to background of the JIT system and the EOQ system and list several instances in which JIT systems are preferred.

As you may already know, an efficient JIT system will lower manufacturing costs, inventory holding costs, eliminate bottlenecks in the production process, etc. The JIT system is able to lower all of these costs because there is not any "wasted" materials laying around. Only what is needed at a certain time is on hand. Transportation costs are also lowered under the JIT system becuase facilities and warehouses have to be located closer to the end customer or manufaturer as to make sure that they have what they need when they need it (economies of scope). This means that there will be more frequent deliveries, but the benefits of these deliveries almost always outweigh the costs of the EOQ system.

While the JIT system can be beneficial to firms, it can also be detrimental. Although aspects of the JIT system are good, the philisophy of most firms is still to produce large batches of products. Whether these products are stored with the supplier or at your firm, the firm is more than likely going to have to handoff some of those holding costs to the customers. This could ultimately make you decide to go with the EOQ model.

JIT systems work best when the product is of high value, transporation costs can be lowered, when holding costs and ordering costs can be lowered, and when there is a good chance of the product being damaged if it were sent in a huge order. The only way that these savings can occur is if the system is streamlined and implemented as efficiently as possible. Any problems with the system could result in the EOQ system becoming the system of choice.

I hope that this has given a detailed look into the advantages of the JIT system over the EOQ system given the importance that price is beginning to have in today's economy. Feel free to read the article to gain even more knowledge in terms of JIT and EOQ.

Michael Cook