The organization’s distribution and logistics are to a great extent affected by the firm’s inventory management systems. Determination of the unit order size and the frequency of [placing those orders are major decisions that organizations should be embraced to make. Economic Order Quantity (EOQ) and Just in Time inventory are the most common types of inventory management systems in the modern economy. EOQ is an inventory related equation that helps firms determine the optimum order quantity held in an organization given a set of cost of production, the rate of demand and other variables (DuBrin, 2010). The objective of EOQ is finding an equation that will lead to the minimum inventory costs. On the other hand, JIT is a form of inventory management system in which materials or products are produced as demand dictates. The system intends to increase efficiency and decrease wastages by only receiving what the demand dictates regardless of the nature of supply.

Under EOQ, the organization must consider the inventory costs involved. The four types that are relevant to the inventory decision making include; item purchase price, order costs, carrying costs and opportunity costs. The inventory management system requires that there is a constant supply of inventory and stock-outs should be avoided at all costs. It is imperative noting that the EOQ method requires the effective balancing of ordering costs with the inventory holding costs for a particular item (DuBrin, 2010). For instance, an organization must be able to balance the cost of ordering small quantities more frequently thus minimizing the holding costs. In essence, the EOQ method is concerned in finding the optimum quantities and frequencies where efficiency is realized.

On the other hand, just in time (JIT) inventory requires the producers to accurately forecast the demand. The sole objective of this management system is to avoid situations in which the inventory exceeds the demand thus placing the organization in an awkward position of maintaining the excess inventory. Just as is the case in the EOQ (Baker & Powell, 2005), JIT also requires a balancing act where the organization must avoid stock outs and at the same time minimizing the inventory costs.

In the 21st century, many organizations have adopted JIT in their inventory management as suppliers and retailers collaborate in the efforts to control inventory costs and at the same time meet the customer demands. It is imperative noting that JIT has been instrumental in reducing inventory management costs through reduced holding costs. Despite the many benefits associated with JIT inventory system, it is worth noting that it poses some challenges especially on the side of suppliers (DuBrin, 2010). The suppliers have the obligation of ensuring that they coordinate properly with retailers to enable maintaining the desired stock levels.  Additionally, businesses that adopt this system are at great risk of business failure especially when there is a problem on the side of the supplier or unexpected increase in demand. Cases of stocks out are common such instances and thus organization are at risk of suffering massive losses. It is therefore prudent for the organization to understand their nature of business before determining the type of inventory management to adopt.

References

Baker, H., & Powell, G. (2005). Understanding financial management. Malden, MA: Blackwell Pub.

DuBrin, A. (2010). Essentials of management. Australia: South-Western.

 
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