Explaining the differences between MRP, EOQ and JIT

Guest Posting by Emmet Fritch, Associate Faculty, Reverse Logistics Management, American Public University System

There is often some confusion in the concepts of Material Requirements Planning, Economic Order Quantity, and Just-in-Time.  The purpose of this article is to describe the differences between Material Requirements Planning (MRP) Economic Ordering Quantity (EOQ) and Just-in-time (JIT) methods of scheduling and material planning.  Both approaches are common in manufacturing environments. However, each method is best used in situations where they align to criteria.  Below is a summary of the two methods and a description of when each is best suited to either batch-mode or continuous manufacturing. In some cases, both methods are in place at the same time.

Equal order quantity (EOQ) is a feature in material requirements planning systems. The EOQ sets the lot size of a production run or the lot size of a purchased product receipt to a quantity that results when ordering costs are equal to carrying costs.

Originally developed for batch production processes at IBM, the concept was revised to include purchased parts.  EOQ is utilized in job-shop or individual batch orders. EOQ allows for efficient utilization of inventory assets and optimum costs. However, the batch size is not as efficient as JIT methods.

JIT methods assume the lot size is one and the possible delivery frequency, as the most frequent required allowing for minimal lot sizes. The optimum lot size of one is often not practical. Most companies set the lot size (in a Kanban) to the quantity required to produce product scheduled for one work shift.   The idea is to keep lot sizes to a minimum, deliver as many times as possible using the smallest lot size possible.

JIT is a demand-pull system driven by customer orders, and because it is a pull system, individual kanbans are set to create a minimal work in process and finished goods inventory levels. Each customer demand-pull results in a corresponding cascaded pull at each Kanban location. As a product is pulled from a Kanban, the workstation replenishes only the quantity required to make the Kanban complete.

JIT methods require accurate forecasts and repetitive production.

A dynamic scheduler roams the factory and finished goods location and adjusts forecasts to trends in ordering activity. The scheduler also determines if Kanban quantities should be adjusted.

Some companies combine the two methods. Choosing the JIT process for work-in-process and the MRP (EOQ) method for ordering purchased parts.

JIT of purchased parts presents challenges for supply chain companies.   When establishing kanbans across suppliers, some might elect to use the MRP process to create sufficient quantities to fill customer Kanbans of supplier finished goods. This process tends to defeat the goal of JIT.

When deciding which method to employ, considering the degree accurate forecasts and repetitive manufacturing exists should be considered. When forecasts are not accurate or when manufacturing is based on job-shop scheduling, MRP is a preferred method.

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The Day the World ran out of sugar

Sometimes it is the little things that really made a difference regarding logistics.  Sometimes it just takes a little change to get people to realize how much was actually being used and how much was actually being wasted.  

When I worked at a very famous theme park in Orlando, they had been using logo sugar since the day they opened, and it was a standard item for all their locations there.  They had one supplier that had been responsible for printing the logo sugar, and they were about to run out.  They was a huge uproar about it, and people were blamed, but in the end, they had to accept the fact that they were going to have to move to regular sugar packages, just like everyone else.  The day came, and the organization was braced for the wave of complaints that people were going to have.

The day came.  A week passed.  Not one complaint.  Management began to wonder if perhaps no one noticed or perhaps locations had been hoarding cases of sugar.  People looked into the situation and found that all locations were using regular individual sugar in the standard packaging.  The question circulated about if people noticed.  Maybe this was a detail that really did not matter to the consumer.   The answer came that people did notice, but not because any customer said a thing, it was realized when the next order of individually packaged sugar had come up. 

The famous theme park had been ordering truckloads of individually packaged sugar every week for years.  The consumption was steady and only increased when more locations opened up.  After a week, the sugar supplier called the Purchasing Department because they had not received the order for the individual sugar.  The reason there was no order was very clear, consumption dropped more than 50%, and there was plenty of sugar to last another week.

One small change that no one really noticed made a huge impact.  It was the culture that kept them from trying the change before, even when there were potential savings right in front of them.  No one wanted to change something that had always been done that way.