A COMPARISON BETWEEN JIT AND EOQ PURCHASING METHOD

OF STEEL FABRICATORS IN DAVAO CITY

An Undergraduate Thesis

Presented to the Faculty of the

College of Accounting Education

In Partial Fulfillment of the Requirements

In Res 1B

Charmaine Divvy R. Erador

Katherine C. Inocando

Ivy S. Ricafort
 Chapter 1

INTRODUCTION

Rationale of the Study

Inventory is the number of stocks held by a business or company and is

considered an asset. Good inventory management is key for a company in achieving

its goal of meeting customer demands and having high profitability (Emelda, 2011).

The economic conditions have forced the business owners to do some changes on

how they run their business. So it is very crucial for a certain company to maintain

inventory in its optimal level and also reduce costs to achieve high profitability.

Nowadays, the competition has been tighter on the business world especially

in the steel fabrication enterprise. Steel fabricators have been constantly trying to find

other ways to reduce the cost of production to increase profit margins. In his study

Whiteside (2013) believed that inventory is money and fabricators can make most out

of it for better profits. The money that has been excessively invested in raw materials

could be invested in other operations instead of just sitting it around the stock room.

Many have conducted studies on the two of the most well-known method or

purchasing inventory in which they think that would be effective in cutting cost

without compromising the competitiveness among similar industries. These two

popular methods are just in time (JIT) and economic order quantity (EOQ).

One of the approaches which have long been proven effective in the

manufacturing sector in cutting costs, improving quality, productivity, efficiency and

decreasing waste is the just in time (JIT) management approach. JIT has been widely

recognized as an operations management approach designed for manufacturing firms

to improve performance through waste reduction (Mazanai, 2012). In addition, the JIT

process is ideal for companies running a single or diverse machines because it offers

various advantages and when correctly implemented would achieve great payback

according to Farell and Brown (2015). On the other hand, another approach is

economic order quantity (EOQ). EOQ determines the point where order cost in

combination with inventory carrying cost is at least. Finding the appropriate quantity

of replenishment that minimizes total inventory will contribute to the company’s

budget performance. From a theoretical point of view, the convenience of small and

frequent deliveries was analyzed based on EOQ model. As calculating method to

minimize purchasing cost, inventory carrying cost and ordering cost, the EOQ model

is complimentary to the safety stock optimization that focuses on finding the optimal

threshold to trigger the reorder (Veromel, 2012).

In view of that, the researchers ought to seek the comparison between the JIT

and EOQ purchasing method to know which method should be efficiently

implemented by the steel fabricator enterprises in Davao City. This study would be

relevant to the said enterprise to improve competitiveness and at the same time

achieve cost efficiency.

Objective of the study

The study attempts determine the comparisons between JIT and EOQ

purchasing method in Davao City. Specifically this research seeks to satisfy the

following objectives:

1. To determine the factors in choosing inventory method

2. To determine the level of internal control for inventory employed by

the steel fabricators

 2.1 Efficiency and effectiveness of operation

2.2 Inventory management system used

3. To determine the relationship between factors in choosing inventory

method and level of internal control for inventory

Statement of hypothesis

Ho: There is no significant relationship between the factors in choosing

inventory method and level of internal control for inventory

Definition of terms

The following operational definitions of terms were used in this study:

Just in time (JIT manufacturing) also known as just-in-time production or the

Toyota production system (TPS) – is a method aimed primarily at reducing flow times

within production as well as response times from suppliers and customers

Economic order quantity – a purchasing method that balances the cost of

ordering an item with the inventory holding cost of an item.

Fabrication – is the process used to manufacture steel work components that

will, when assembled and joined, form a complete frame.

Inventory – refers to the products or items that the company accounted for as

either manufactured or held for sale.

Significance of the study

The findings of the study will benefit the following:

 Steel fabricators enterprises in Davao City – The result of the study

will serve as guide to the enterprise in its inventory purchasing method

to help cut costs through the results cited by the study.

 Accountancy teachers – The results provided by the study will give the

teachers an idea of what inventory purchasing method is commonly

used by the steel fabricators in Davao City.

 Accountancy students – the results of the study will give the students

an idea that will be beneficial to them for future employment.

References:

Emelda, M. (2011). Differences between EOQ and JIT. DifferenceBetween.net

Retrieved July 8, 2016, from

http://www.differencebetween.net/business/difference-between-eoq-and-jit/

Farrell, B. & Brown, M. (2015). The Fabricators. Retrieved July 10, 2016, from

http://www.thefabrication.com/article/cadcamsoftware/adjusting-to-a-just-in-time-

manufacturing-environment

Mazanai, M. (2012). Impact of just-in-time (JIT) inventory system on

Efficiency, quality and flexibility among manufacturing sector, small and medium

enterprise (SMEs) in South Africa. Retrieved July 8, 2016, from

http://www.academicjournals.org/ajbm

Vermorel, J. (2012). Economic Order Quantity (EOQ), Definition and Formula.

Retrieved July 10, 2016, from

http://www.lokad.com/calculate-safety-stocks-with-sales-forecasting

Whiteside, W. (2013). Time to outsource inventory management? The Fabricators.

Retrieved July 10, 2016, from

http://www.the fabricator.com/article/shopmanagement/time-to-outsource-inventory-

managementr