Aaron's EOQ, EPQ, and JIT Article Response

In response to, "A comparative analysis of inventory costs of JIT and EOQ purchasing":

This article seems to present a useful model for finding the break even points and points of maximum profitability for EOQ and JIT purchasing practices. However, I think that it is worth pointing out that both models leave out a great deal of details. The absence of these details highlights the fact that managers must consider other factors besides these relatively simple formulas when deciding on the correct type of purchasing for their company.

The EOQ Formula, in some cases, fails to calculate the correct order quantity if incorrect holding costs are used. This could easily be the case since many of the inputs into holding cost are approximations. In addition, when comparing EOQ and JIT, JIT may save additional costs such as fixed warehouse management costs or personnel costs. These costs are not included in either equation.

The largest disclusions that I noticed, however, were in the JIT cost calculations. For instance, when adopting JIT, transportation costs are explicitly considered. This seems odd because not all suppliers would be willing to locate close to their customers. Therefore, transportation costs could end up being prohibitive for certain manufacturers. Also, the JIT formula simply calculates costs to one company, but if suppliers have to relocate and ship items frequently then overall costs to the supply chain may increase.

Finally, managers must consider the variability of demand and the type of each item when deciding on a purchasing system. This is important, because if the company does not have advanced technological systems and the ability to predict demand correctly every time, then it will incur costs related to shortages of needed parts. These costs could also occur if suppliers deliver the wrong parts. These factors must be considered when making ordering decisions.


In response to, "EOQ and EPQ with linear and fixed backorder costs: Two cases identified and models analyzed without calculus":

I found this article very hard to follow. Though I felt that the author did a decent job of explaining his calculations, it was difficult for me to follow all of his reasonings and modifications of the formulae. The main insight that I got out of this article is that if the fixed backorder cost per unit is larger than the term SQRT(2kh/rD) then there should be no backordering. If it is smaller, then some backordering should occur. In addition, the linear backordering cost can never be large enough by itself to make backordering an overall bad idea.

These two findings could be used by a business fairly easily as a rule of thumb to see if backordering should take place for various items. That is, of course if they could accurately calculate values for the two backordering costs.