REPORT

JIT

EOQ

FROM:

VIKAS KUMAR
IIM Sirmaur
PGP04092

JIT
Just-in-time JIT manufacturing, also known as just-in-time production, is a methodology
aimed primarily at reducing times within production system as well as response times from
suppliers and to customers. Its origin and development was in Japan, largely in the 1960s and 1970s
and particularly at Toyota.

It is also known as Toyota Production System (TPS).

While moving into 1990’s, the new term lean manufacturing became established.

Value Chain and Logistics Network:

The value chain was described and popularized by Michael Porter (1985) in his bestseller,
Competitive Advantage: Creating and Sustaining Superior Performance. The value chain describes
the full range of activities that are required to bring a product from its conception to its end use.
These generic value-adding activities are divided in two major groups. The "primary activities"
include: inbound logistics, operations (production), outbound logistics, sales and marketing, and
service (maintenance). The "support activities" include: administrative infrastructure management,
human resources management, R&D, and procurement. The goal of these activities is to offer the
customer a level of value that exceeds the cost of the activities, thereby resulting in the profit
margin.

Logistics network has a far wider meaning than just goods delivery and channel distribution system.
It is the total flow of materials, information and cash, from the suppliers' suppliers, right through an
enterprise to the customers' customers. The flows of materials and cash are opposite, but
information needs be visible throughout to give control over what is happening in the chain.
About Just-In-Time (JIT) concept:
Just in Time (JIT) production is a manufacturing philosophy which eliminates waste associated with
time, labour, and storage space. Basics of the concept are that the company produces only what is
needed, when it is needed and in the quantity that is needed. The company produces only what the
customer requests, to actual orders, not to forecast. JIT can also be defined as producing the
necessary units, with the required quality, in the necessary quantities, at the last safe moment. It
means that company can manage with their own resources and allocate them very easily. Figure 2
shows a drawing of the JIT concept.

History and Philosophy:

The technique was first used by the Ford Motor Company during 1920s, but the technique was
subsequently adopted and publicised by Toyota Motor Corporation of Japan as part of its Toyota
production System (TPS). In 1954 Japanese giant Toyota implemented this concept in order to
reduce wasteful overstocking in car production.

Benefits and problems:

Benefits that JIT concept can provide to the company are huge and very diverse. The main benefits
of JIT are listed below:

1. Reduced set up times in warehouse - the company in this case can focuses on other processes
that might need improvement;
2. 2. Improved flows of goods in/through/out warehouse - employees will be able to process
goods faster;

3. Employees who possess multi-skills are utilized more efficiently - the company can use
workers in situations when they are needed, when there is a shortage of workers and a high
demand for a particular product;

4. Better consistency of scheduling and consistency of employee work hours - if there is no

demand for a product at the time, workers don’t have to be working. This can save the company
money by not having to pay workers for a job not completed or could have them focus on other
jobs around the warehouse that would not necessarily be done on a normal day;

5. Increased emphasis on supplier relationships - having a trusting supplier relationship is

important for the company because it is possible to rely on goods being there when they are
needed;

6. Supplies continue around the clock keeping workers productive and businesses focused on
turnover - employees will work hard to meet the company goals.

There are several problems which are connected within JIT concept. Maybe the major problem
with JIT operation is that it leaves the supplier and downstream consumers open to supply shocks.
With shipments coming in sometimes several times per day, the company is especially susceptible
to an interruption in the flow. For that reason, some companies are careful to use two or more
suppliers for most of theirs assemblies. The hidden costs are present and they include labour union
leverage, problems with flexible manufacturing systems (FMS), problems developing for the
flexible workforce, difficulties with supplying commodities using JIT, increased expenses for
suppliers.

Implementation of JIT concept:

There are several general guideline steps

for easier JIT implementation. The
following algorithm shows what the company
has to do if it wants to implement the JIT
concept.
1. First of all, top management must accept idea of the JIT. Without their permission it is not
possible to move on with the whole process.

2. Second step for a company is success which is connected with the fact that employees also
have to understand significance of the new concept. Very important in this step is to explain to
workers that JIT is not some kind of bad monster and not something unimportant for their work. It
is desirable to hold a series of training sessions to familiarize employees with the fundamentals of
the JIT concept.

3. The third step would be the setup of ERP (Enterprise Resource Planning). ERP is a system
which integrates all data and processes of an organization into a single unified system. It is
impossible nowadays to run successful production without strong support of an information system.

4. The next step would be to test our own system. Now all preconditions of the JIT
implementation are considered and we are trying to figure out: are there any difficulties to start with
implementation. In this step one question comes up: "Is the system ready for JIT implementation?".
When the answer is NO, it is recommendable to go back and do changes. If the answer is YES,
everything is prepared for the implementation process.

5. The last step is testing and control. For successful existence and developing of the JIT system
there must be continuous control. Without control things can sway from the right direction. Of
course, feedback loops also exist and they are very important for the whole process.

Conclusion:
After all, I think that if the company wants to have a JIT concept it does not mean that everything
must be done very fast. The most important thing for the company is to have good organized
resource allocation. Also, the management and employees must have on their mind that this concept
can help the organization to solve many problems in logistics.

Economic Order Quantity (EOQ)

Introduction:

This model is known asEconomic order quantity (EOQ) model, because it established the most
economic size of order to place. It is one of the oldest classical production scheduling models. In
1913, Ford W. Harris developed this formula whereas R. H. Wilson is given credit for the
application and in-depth analysis on this model.By using this model, the companies can minimize
the costs associated with the ordering and inventory holding.It can be a valuable tool for small
business owners who need to make decisions about how much inventory to keep on hand, how
many items to order each time, and how often to reorder to incur the lowest possible costs.There are
two most important categories of inventory costs are ordering costs and carrying costs.

Ordering costs: It is the costs that are incurred on obtaining additional inventories. They include
costs incurred on communicating the order, traveling allowance and daily allowance to purchase
officers, printing and stationary, salary of purchase department, cost of inspection, cost of receiving
the material, transportation cost etc. all above cost, other than transport costs remain unchanged per
order irrespective of the order size. 2 Dr. Rakesh Kumar Therefore, it is assumed that ordering cost
per order remain constant. The more frequently orders are placed, and fewer the quantities
purchased on each order, the grater will be ordering cost and vice versa. This relation is shown in
the figure below.

Carrying cost: It is the cost incurred for holding inventory in hand. They include interest on the
money locked up in stocks, storage costs, deterioration spoilage costs, insurance, evaporation,
godown rent, pilferage, shrinkage, obsolescence, other overhead of stores department etc. They are
assumed to be constant per unit of inventory. The large the volume of inventory, the higher will be
the inventory carrying cost and vice versa. This relation is shown in the figure below.
From the above discussion it is clear that ordering costs and carrying costs are quite opposite to
each other. If we need to minimize carrying costs we have to place small order which increases the
ordering costs. If we want minimize our ordering costs we have to place few orders in a year and
this requires placing large orders which in turn increases the total carrying costs for the period.We
need to minimize the total inventory costs, Thus EOQ is determine by the intersection of ordering
cost curve and carrying cost line. At this point total ordering cost is equal to total carrying cost, and
the total of the two costs is the least this is shown in the figure below.

Mathematical Formulation:
The above graphic method of determining EOQ may not provide the most accurate result.
Economic order quantity can be calculated mathematically with a great degree of accuracy as given
blow:

Formula:

EOQ = √(2×A×O)/C
Where,
EOQ = Economic order quantity
A = Annual demand in units
O = Cost incurred to place a single order
C = Carrying cost per unit per year

Assumptions in EOQ Model:

The formula is based on the following assumptions. Without these assumptions, the EOQ model
cannot work to its optimal potential. 1. The demand rate for the year is known and evenly spread
throughout the year. 2. There is no time gap between placing an order and receiving its supply. 3.
Ordering cost very directly with the number of orders. 4. Carrying cost very directly with the
average inventory. 5. There is no quantity discount.

Limitations of the EOQ Model:

The assumptions made in the EOQ formula restrict the use of the formula. In practice cost per unit
of purchase of an item change time to time and lead time are also uncertain. It is necessary for the
application of EOQ order that the demands remain constant throughout the year which is not
possible. Ordering cost per order can’t be constant because it’s including transport cost.

Conclusion:

The EOQ is very useful tool for inventory control it may be applied to finished goods inventories,
work-in-progress inventories and raw material inventories. It regulate of purchase and storage of
inventory in such a way so as to maintain an even flow of production at the same time avoiding
excessive investment in inventories.