a) Calculation of the Economic Order Quantity

The idea is pretty simple:

Holding goods in stock has a cost.
If a business does not need a stock, then it will need to pay for a
storage facilities, or to a storekeeper. The less stock the business
holds, the less it has to pay for its storage. So the main argument
here, that a business should try to order stock in small amounts,
but more frequently. For example Every week.
However, this in turn means that a Purchase ordering department
will have load of work to do. If a company will only place large
orders less frequently that will require fewer resources to run the
purchasing section.
Now, EOQ allows to quantify the specific ordering quantity for each
stock item which will keep the combination of these costs at a
minimum level.
It is calculated using a formula:
EOQ = (2pd/h)
Where:
H = Holding cost of one unit for one year.
P = Average cost of making one purchase order.
D = Annual demand in units.
Now, the problematic part is that it is of a limited practical use.
First of all: calculation of the above numbers is quite difficult:
h & p involve too many estimations and averages
d is a forecast figure, rather than a certainty
The formula above will give a precise mathematical answer, which
should actually be treated as an estimate rather than an accurate
figure.
For EOQ to be useful Business should operate in a very stable
economic environment where the predictability of transactions is
high.
EOQ does not consider any seasonal fluctuations.
Though, EOQ gives an answer to how much inventory should be
ordered, it does not give an answer to when should it be ordered.

EOQ model assumes in instantaneous procurement of material.

However, in practicality, procurement of material needs some time.

b) Just-in-time production methods

As discussed above - Holding goods in stock has a cost.
The main principle of JIT is to try to reduce the required inventoryholding levels by negotiating the guaranteed delivery of inventory
at the time it is actually needed for production, or selling.
It becomes obvious that JIT would be mostly suitable for businesses
with a high predictability of demand, so that a company could
predetermine the scheduling a supply-chain.
Now, as we have already covered in the last tutorial with Brenda
that a company is usually spilt in divisions and sub-divisions in
should be pointed out that JIT can be applied externally, or
internally. External application will define the external
supplier/customer delivery mechanism, where internally it will
consider each sub-division within a production process as internal
supplier/ internal customer units within the same company. The
main idea of JIT is that the materials have to be delivered in an
exact amount required, on exact time, with exact functions and
features and at predetermined cost. It must be noted, that this
process must work properly even if there is more than one delivery
a day, only in this case it will be effective.
It must be noticed that it is suppliers responsibility to ensure on
time delivery not the companys!
As the inventory is ordered exactly when it is needed it will
decrease inventory holding costs (rent, insurance, security,
managing the stock, etc.) In other words less amount of funds is
tied in the working capital.
Usually if there is a rapid decrease in demand for the product
company might start building-up an unsold stock. This might lead
to the issues like obsolescence, perishing (important for groceries),
or out of date (important to any technological, IT, or fashion
industries). JIT approach allows to avoid it.
The focus of JIT system is not the lowest price of materials ordered,
but the highest quality and delivery times. You want to get
inventory as fast as possible, and at all costs you would want to
avoid any product rejections, or returns from your customer. So a
company will usually have less suppliers, as they have to be
reliable. Also known as quality suppliers. M&S could actually be a
good example here.

The problematic area is that risk lays on companys relationships

with its suppliers.
This system is actually pretty beneficial for suppliers in terms of an
existence of a supplying contract, which a company cant change
easily. It will simply break the whole system. So JIT is beneficial
from the both perspectives for the company and for the suppliers.
JIT also improves your manufacturing process by addressing any
problems immediately after they occur. This is basically because the
company does not have any spare stock to cover themselves in
case of failure, so they must reduce the risks to a minimum. This in
turn increases the transparency in the production process.
In terms of MACA this will simplify the accounting treatment as
there will be no Work In Progress. And very little levels of re-work
and wastage that you need to take into account. Less warehousing
costs, means that there will also be less indirect costs.
c) Materials Requirement Planning
In real life Big Companies usually have many different products,
different grades of labour required, different elements of raw
materials. Companies usually have a software system in place to
support you with the inventory management. One of the earliest
systems that was developed was MRP. MRP works backward from a
production plan for finished goods to develop requirements for
components and raw materials. It is a computerized system which
has different sections:
Master Production Schedule: It basically tells you what inventory
and machinery is needed for production, and labour required.
Bill of Materials File: Sophisticated Inventory System. It identifies:
What you want to produce? What you need to produce? What stock
we have got? How and when do we need to reorder our stock?
This system developed over time to something known as MRP 2,
which is Manufacturing Resource Planning, which was the beginning
of the nowadays Enterprise Resource Planning (ERP), which links
various functional areas across an entire business enterprise. MRP 2
incorporated marketing, finance, and accounting, engineering, and
human resources aspects into the planning process.
Main Benefits of MRP Systems are helping production managers to:
Minimize inventory levels and the associated carrying costs
Track material requirements
Determine the most economical lot sizes for orders
Compute quantities needed as safety stock
Allocate production time among various products

Plan for future capacity needs

Main criticisms of the FIRST MRP SYSTEMS are:
1) It is backward looking: I want to produce the order of so many
units for the customer, and when you are using the software it
will look backwards and will tell you the estimate of when you
should have started the actual production to manage to do it in
time. Sometimes it can go wrong. Especially if the production
process was improved, or was amended in any way.
2) It assumes Infinite Capacity: You are always limited with the
resources which you have. You can only produce using a certain
time scales.
3) Fixed Batching Rules: Assumption that a company is
implementing production by producing products in batches of
the particular size. No flexibility.
4) Optimised Production Technology (OPT): Identification of bottle
necks. Where you can only produce the particular number of
batches and products at a time. So OPT recognised that
efficiency can be managed better by managing this bottle neck
5) MRP relies upon accurate input information. If a small business
has not maintained good inventory records or has not updated
its bills of materials with all relevant changes, it may encounter
serious problems with the outputs of its MRP system, like
missing parts, excessive order quantities and delays in delivery.
6) Another potential drawback associated with MRP is that the
systems can be difficult, time consuming, and costly to
implement. Especially if you have to train people how to use
them. And you will also incur a lot of negative responses in the
future if you will decide to switch over to another MRP system,
where people who worked many years for the company will have
to start learning how to work with a new system.