| Definition |
A quantitative inventory management model that determines the optimal order size minimizing total inventory costs. |
An inventory strategy focused on receiving goods only as they are needed in the production process to reduce inventory costs. |
| Objective |
Minimize total costs related to ordering and holding inventory. |
Minimize inventory levels and waste by synchronizing production with demand. |
| Inventory Levels |
Maintains a certain amount of stock to balance ordering and holding costs. |
Maintains minimal or near-zero inventory. |
| Order Frequency |
Orders placed in calculated optimal quantities at set intervals. |
Orders placed frequently, often in small quantities based on demand. |
| Cost Focus |
Balances ordering cost and holding cost to minimize total inventory cost. |
Focuses on reducing carrying costs, storage costs, and waste. |
| Risk of Stockouts |
Lower risk due to maintaining safety stock. |
Higher risk if supply chain is disrupted. |
| Supply Chain Dependence |
Less sensitive; can tolerate some lead time variability. |
Highly dependent on reliable and fast suppliers. |
| Complexity |
Mathematical formula driven, relatively straightforward to implement. |
Requires strong coordination, real-time data, and process integration. |
| Implementation |
Widely used in traditional inventory management. |
Common in lean manufacturing and just-in-time production systems. |
| Impact on Cash Flow |
Requires capital tied up in inventory until used. |
Improves cash flow by reducing inventory holding. |
| Typical Industries |
Applicable to many industries with predictable demand. |
Mostly used in automotive, electronics, and industries with fast turnover. |
| Order Size |
Optimal fixed quantity calculated based on demand and costs. |
Variable small order sizes aligned closely with production needs. |
| Flexibility |
Less flexible to demand fluctuations. |
Highly flexible, adapts quickly to demand changes. |
| Waste Reduction |
Indirectly reduces waste through inventory optimization. |
Directly reduces waste by minimizing overproduction and excess stock. |
| Supplier Relationship |
Supplier flexibility less critical. |
Requires close, reliable supplier relationships. |
| Technology Requirement |
Minimal; can be managed with spreadsheets or basic software. |
Requires advanced IT systems and real-time tracking. |
| Inventory Holding Cost |
Considered explicitly in the EOQ formula. |
Minimized by design. |
| Ordering Cost |
Included in the EOQ calculation to optimize order size. |
Reduced due to frequent and smaller orders. |
| Lead Time Sensitivity |
Can accommodate some lead time variation. |
Very sensitive; delays can halt production. |
| Example |
A retailer ordering 500 units per batch to minimize combined ordering and storage costs. |
An auto manufacturer ordering parts daily to match production schedule. |
EOQ vs JIT