JIT - Zero inventory EOQ

Maintaining a minimum level of inventory as part of a goal to reduce costs and increase profitability. Although an actual level of zero inventory is unlikely, a strategy to reduce inventory should result in lower expenses associated with warehousing, spoilage, and so forth. The term is sometimes used synonymously with just-in-time inventory. Zero inventory, another perfectionist goal, is ironically the most powerful JIT principle but the least understood and appreciated. The concept appears unprecedented, dangerous, and suicidal. Why should companies precariously operate without any stocks on hand, when business can proceed smoothly with at least some inventory? Most JIT literature focuses on how to eliminate inventory and much less on why it should be done. This article will explain why stockless operation is necessary for survival in this highly competitive environment by pointing out the common misconceptions about keeping inventory. I feel that an enlightened company would be so determined to get rid of inventory that it would find ways and means to do so by itself Most literature on production and inventory management subscribes to the traditional view that the level of inventory can be optimized by ordering an economic order quantity (EOQ). The EOQ formula states that the optimum order or production quantity is the amount at which the total inventory cost is minimum. Using calculus, this is the amount at which the carrying costs (insurance, interest, etc.) equals the ordering or set-up costs (paperwork, machine-set-up time, etc.). The principle says that any amount below or above this EOQ will tend to increase total costs. The theory is correct, simple, beautiful, but seldom applied in practice. Why is the EOQ approach a failure? One reason is its utter simplicity - it is limited to unrealistic single-product, steady demand and static costs assumptions. The academe and operations research specialists have come up with more sophisticated EOQ models that claim to handle some product

variety and changes in costs and demand over time. But these highly theoretical models using advanced calculus lack appeal to and beyond the comprehension of practitioners and decision-makers in the company. The EOQ principle also requires lots of accurate information as inputs, carrying costs, set-up cost, unit costs, and demand for each product. Most companies do not possess, update, nor monitor these information consistently or accurately. Most would not be willing to invest in manpower and information systems to track these down just to get EOQ's for each item carried. The business tasks of purchasing and production can proceed without these bothersome EOQ's. In fact, many companies just use rules of thumb, experience, and gut-feel to set the number of days, weeks - or months supply of each product or item they carry. JIT's zero inventory has none of the EOQ's drawbacks. It is easy and simple to formulate, understand, instruct, follow, and execute. Under zero inventory, minimum is optimum. The object is to minimize all inventory and order quantities until these reach zero levels. It is not deriving some vague magic number from other vague numbers. Zero inventory can be applied in the most static or dynamic situation even with the most imperfect or incomplete information. The zero targets stay even when products, costs, or demand pattern change, and whether or not you know all about your costs and products. EOQ defenders would say that minimizing inventory may reduce carrying costs (since there's practically nothing to carry), but it will bloat set-up or ordering costs, and total costs as well, since placing orders and/or setting up would have to be done much more frequently to maintain minimum stock levels. Under JIT, set-up time and costs are not constant, immovable assumptions - and they too shall be minimized just like inventory. JIT companies have the most advanced technology in reducing set-up time - for instance a 6-hour die exchange is reduced to 30 seconds. Long set-up time is not allowed to get in the way of inventory minimization. One good thing leads to another under JIT : reduced set-up time and costs not only make low inventories economical and feasible, but also allow shorter production runs and the scheduling of more types or varieties of product in a day. This production mix flexibility enables the company to cope with sudden and unpredictable changes in demand and consumer preferences.