Costs associated with inventory make up one of the most critical cost areas within an organization. Whether the company manufactures goods or sells finished products, inventory carrying costs and their component parts can represent a significant portion of the company's cost structure. In addition, having the wrong amount of inventory on hand can result in severe difficulties. Having too much inventory on hand means that extra warehouse space is needed in addition to the costs associated with the inventory itself. In a manufacturing environment, having too little inventory for input goods means that production slows down, or is even halted. In both manufacturing and retail environments, not having enough inventory on hand to meet consumer demand results in lost sales, and lower revenue than would otherwise be realized. Because of these critical factors, inventory management has become an important part of most organizations. This research examines a particular type of inventory management, just-in-time (JIT), and examines how JIT can be implemented and the costs and benefits associated with this method of inventory control.
The traditional approach to inventory management focuses on the economic order quantity (EOQ), which facilitates the determination of an optimum level of investment in inventory by minimizing the total costs of obtaining and carrying inventory. The costs of obtaining inventory (ordering costs) include costs of preparing purchase orders or production requests, receiving costs, administrative costs, and the costs associated with small production runs, overtime, setups and training. Carrying costs include insurance, property tax, deterioration, spoilage, obsolescence, storage space and an investment cost (Andel, 1994, p. 120).
Under EQO management systems, the annual inventory carrying cost is expressed as average inventory multiplied by the cost of holding one unit of inventory for one year. Annual ord...