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Economic order quantity (EOQ) versus just‐in‐time

(JIT) purchasing: an alternative analysis in the
ready‐mixed concrete industry
a a
Wu Min visiting research scholar & Low Sui Pheng
a
Faculty of Construction Management , Chong Qing Jiao Tong University , P.R. China
b
Department of Building , National University of Singapore
c
School of Architecture and Building, Geelong Waterfront Campus , Deakin University , 1
Gheringhap Street, Geelong , Victoria 3217 , Australia E-mail:
Published online: 17 Feb 2007.

To cite this article: Wu Min visiting research scholar & Low Sui Pheng (2005) Economic order quantity (EOQ) versus
just‐in‐time (JIT) purchasing: an alternative analysis in the ready‐mixed concrete industry, Construction Management and
Economics, 23:4, 409-422, DOI: 10.1080/01446190500041339

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 Construction Management and Economics (May 2005) 23, 409–422

Economic order quantity (EOQ) versus just-in-time

(JIT) purchasing: an alternative analysis in the ready-
mixed concrete industry
WU MIN1* and LOW SUI PHENG2
1
Faculty of Construction Management, Chong Qing Jiao Tong University, P.R. China
2
Department of Building, National University of Singapore

Received 22 January 2004; accepted 9 December 2004

Downloaded by [University of Alberta] at 08:56 04 October 2014

The literature on the use of just-in-time (JIT) and economic order quantity (EOQ) purchasing has increasingly
favoured JIT in recent years, especially when firms are purchasing to meet high and consistent levels of demand,
and the JIT operation can take advantage of inventory physical plant space reduction. The theoretical
advantages of JIT purchasing may have been overstated. Two new concepts are developed to underpin the idea
that, even if the JIT approach can induce inventory physical plant space reduction, it is possible for EOQ to be
more cost effective, as the inventory demand approaches the break-even point between the function of the
annual holding capacity of an inventory facility and the function of the EOQ–JIT cost indifference point. The
survey and case study conducted in the ready-mixed concrete industry in Singapore support this proposition.

Keywords: Break-even point, cost indifference point, EOQ, holding capacity, inventory facility, JIT

Introduction Willis and Huston, 1992; Grant, 1993; Wu and Low,

2003).
Background In this study, EOQ is defined as the level of orders
needed to minimize the costs of ordering and holding
The just-in-time (JIT) production philosophy, which
inventory. Whether or not to switch from an EOQ
contains a comprehensive set of principles and techni-
target to a JIT purchasing approach is a difficult
ques, is probably one of the most important productiv-
decision, and that should require careful examination
ity enhancement management innovations of the 20th
of a number of variables: the inventory ordering and
century (Schonberger, 1982). JIT aims to provide the
holding costs (Fazel, Fischer and Gilbert, 1998;
right materials, in the right quantities and quality, ‘just
Schniederjans and Cao, 2000), out-of-stock costs
in time’ for production (Vokurka and Davis, 1996). JIT
(Johnson and Stice, 1993), the impact of the inventory
purchasing of materials is one of the most important
policy on product quality, waste management (Low
principles and techniques of the JIT philosophy
and Chan, 1997), production process (Rao and
(Norris, 1992; Cheng and Podolsky, 1996; Monden,
Scheraga, 1988; Zhu, Meredith and Makboonprasith,
1998; Low and Choong, 2001). Companies in various
1994), customer service and organizational competi-
industries that still use the economic order quantity
tiveness (Cheng and Podolsky, 1996).
(EOQ) purchasing approach are increasingly faced with
the decision of whether or not to switch to the JIT
purchasing policy (Chyr, Lin and Ho, 1990; D’Ouville, Research problem
To help companies that were still using the EOQ
*Author for correspondence. Dr Wu Min, visiting research scholar, approach in managing their raw materials’ procurement
School of Architecture and Building, Geelong Waterfront Campus, to make an informed decision as to whether or not to
Deakin University, 1 Gheringhap Street, Geelong, Victoria 3217,
Australia. E-mail: wuminphdthesis2004@yahoo.com.hk, or minwu@ switch from the EOQ approach to the JIT purchasing
nus.edu.sg, or minwu@deakin.edu.sg approach, Fazel (1997) developed a series of innovative
Construction Management and Economics
ISSN 0144-6193 print/ISSN 1466-433X online # 2005 Taylor & Francis Group Ltd
http://www.tandf.co.uk/journals
DOI: 10.1080/01446190500041339
 410
mathematical models to compare directly the cost
difference between the EOQ system and the JIT
purchasing system. Fazel (1997) suggested that
although the choice of either the EOQ or the JIT
purchasing system depends on many parameters, an
indifference point (i.e. the level of demand at which the
costs are the same) exists between the EOQ and the JIT
purchasing system. Beyond this point, JIT inventory
purchasing is not preferable. Importantly, the EOQ–
JIT cost indifference point proposed by Fazel (1997)
was low; as it was believed that storage facility
operating costs, for example, ‘rental, utilities and
personnel salaries’ were ‘fixed costs’ under the EOQ
and JIT purchasing system (Fazel, 1997, p. 501) and
were thus not considered in Fazel’s (1997) EOQ–JIT
cost difference models. Therefore, Fazel’s (1997)
models suggested that ‘JIT inventory purchasing is
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only preferable at low levels of annual demand’
(Schniederjans and Cao, 2001, p. 110).
While quoting the research findings by Schonberger
(1982), Wantuck (1989) and others, Schniederjans and
Cao (2001) argued that the ‘storage facility operating
costs’ described above were not fixed and would fall
during JIT inventory operations. In analysing a ‘JIT
purchasing system’, they added physical space savings to
Fazel’s (1997) ‘fixed cost’, and derived their own EOQ–
JIT cost indifference point. This revised EOQ–JIT cost
indifference point was naturally higher than Fazel’s
(1997). Schniederjans and Cao (2001) then argued that
the revised EOQ–JIT cost indifference point would be so
high, ‘that the only way inventory could be ordered
would be on a continuous, JIT basis. Otherwise, the
purchaser would be so inundated with inventory that
major purchase of additional space would have to be
acquired, again forcing a new round of additional facility
space costs favoring a JIT system …’ (Schniederjans and
Cao, 2001, pp. 116–17). They further argued that
‘saving space and using it to house additional increasing
amounts of inventory to meet larger annual demand are
juxtaposed issues …’ (Schniederjans and Cao, 2001,
p. 116). They concluded that because the JIT operations
experience or can take advantage of reductions in
physical plant space, ‘a JIT system would virtually
always be preferable to an EOQ system …’
(Schniederjans and Cao, 2001, p. 116), and demon-
strated their argument using a figurative example.
JIT purchasing is not always successful. Many
companies are still using the EOQ-based inventory
ordering system to purchase their raw materials, despite
the fact that the plants adopting JIT operations can take
advantage of physical plant space reduction (Wu and
Low, 2003). Moreover, Schniederjans and Cao (2001)
were unable to show scientifically how the level of
inventory at the EOQ–JIT cost indifference point could
be identified and maintained.
Wu and Low
Research aim
The aim of this paper is to derive the formula of the real
EOQ–JIT cost indifference point, called the ultimate
EOQ–JIT cost indifference point; a point not yet
derived by Schniederjans and Cao (2001). This is
approached by expanding on two new concepts,
namely, the annual holding capacity of an inventory
facility and the break-even point between the function
of the annual holding capacity of an inventory facility
and the function of the EOQ–JIT cost indifference
point. This will be performed and illustrated through
detailed analysis of cement purchasing in Singapore’s
ready-mixed concrete (RMC) industry.
The term ‘inventory facility’ in this study is defined
as a physical site at which raw materials, goods or
merchandise are stored. In the RMC industry, an
inventory facility can be a storehouse, a warehouse, an
aggregates depot or a cement terminal. The annual
holding capacity of an inventory facility is defined as
the amount of inventory that can be held by the
inventory facility in a year when assuming each unit of
inventory takes up a fixed amount of area of the
inventory facility and the inventory is ordered at its
optimal economic order rate. The features of the
annual holding capacity of an inventory facility and
the details of the function of the EOQ–JIT cost
indifference point proposed by Schniederjans and
Cao (2001) will be presented later.
One of the possible reasons contributing to
Schniederjans and Cao’s (2001) conclusion that JIT
purchasing would virtually always be preferable to an
EOQ system is their failure to note the existence of a
break-even point between the function of the annual
holding capacity of an inventory facility and the
function of the EOQ–JIT cost indifference point that
they themselves proposed. The break-even point makes
it possible for the EOQ system to be more cost effective
than the JIT purchasing system at a high annual
demand, even if the JIT operation can take advantage
of physical plant space reduction, as observed by Wu
and Low (2003). The details of the break-even point
between the function of the annual holding capacity of
an inventory facility and the function of the EOQ–JIT
cost indifference point proposed by Schniederjans and
Cao (2001) will be further analysed later.
Research assumptions
The break-even point between the function of the
annual holding capacity of an inventory facility and the
function of the EOQ–JIT cost indifference point will be
developed by expanding one assumption in the plat-
form created by Schniederjans and Cao (2001). This
platform was developed based on the classical EOQ
 EOQ versus JIT purchasing
model of Harris (1915), the models of Fazel (1997) and
the assumptions made by them. Schniederjans and
Cao’s (2001) platform included ten explicit or implicit
assumptions.
These assumptions are as follows: (1) ordering cost
under the EOQ system is fixed per order (Harris,
1915); (2) holding cost under the EOQ system is
constant on a per unit basis (Harris, 1915); (3) total
holding costs (excluding the inventory physical storage
costs) are linearly related to the average quantity held in
inventory (Harris, 1915); (4) annual demands for the
item under the EOQ and JIT purchasing system are
known and constant (Fazel, 1997); (5) the unit price
per item under the EOQ and JIT purchasing system
remains constant (Fazel, 1997); (6) orders under the
EOQ system are arranged in such a way that the
succeeding delivery arrives at the time that the quantity
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from the previous delivery has just been depleted
(Harris, 1915); or ‘safety stock costs required in an
EOQ model are balanced out by other costs incurred in
the use of a JIT model’(Schniederjans and Cao, 2001,
p. 112). Hence, safety stock and out-of-stock costs are
not considered. (7) The orders under the EOQ system
are raised at the optimal economic order quantity
(Fazel, 1997); (8) the materials suppliers of the JIT
companies produce and store their products in large
batches and respond to the JIT challenge by delivering
them in small qauntities. The carrying and ordering
costs (e.g. storage, inspection, transportation, prepara-
tion of purchasing orders for each delivery, etc.) of the
JIT company are mainly transferred to the material
suppliers and solely reflected in the unit price to the JIT
company. Therefore, the unit price under the JIT
purchasing system, which includes the portion of
holding and ordering costs that are passed on the the
buyer, is higher than the unit price under the EOQ
system (Fazel, 1997); (9) total costs under the JIT
purchasing system is the product of annual demand
and the unit price minus the annual facility cost
reduction (Schniederjans and Cao, 2001); (10) the
additional benefits of EOQ or JIT purchasing approach
will not be included in the EOQ–JIT cost difference
mathematical models but will be discussed in the
discussion section. These additional benefits of JIT
purchasing are ‘the impact of different purchasing
policies on quality and flexibility of operations’ (Fazel,
1997, p. 504). The additional benefit of the EOQ system
is its low out-of-stock costs (Johnson and Stice, 1993).
It should be noted that assumptions 1–9 can seldom
be met exactly in practice. However, they can help
develop a model to select an inventory purchasing
policy. A possible reason for the tenth assumption is
that the additional costs of the EOQ or JIT purchasing
system are difficult to estimate. It is even more difficult
to include these additional costs into the EOQ–JIT cost
411
difference functions appropriately. It should also be
noted that none of the models of Fazel (1997) or
Schniederjans and Cao (2001) have considered the
ability of an EOQ approach to give a firm the flexibility
to take on unexpected orders. This flexibility is a
commonly cited argument in favour of this inventory
purchasing approach.
The sole assumption (assumption 11) added in this
paper is that the inventory physical storage costs under
the EOQ system, for example, rental, utilities and
personnel salaries, are linearly related to the average
inventory level. This is to expand the ‘total holding
costs’ in the classical EOQ model (assumption 3) to
include the inventory physical storage costs. This
assumption can be valid when selecting an inventory
purchasing system either for a new entrant or for an
existing company which is considering switching from
the EOQ approach to the JIT purchasing approach. For
a new entrant, the amount of inventory facility, utilities
and the number of logistics staff can be easily adjusted
based on the average inventory level, as the inventory
facilities have not been built yet. For an existing EOQ
company, the excess inventory facility can be rented
out if this company switches to a JIT purchasing
approach as observed by Schniederjans and Cao (2001)
and the logistics staff can be reallocated to other posts.
It should be noted that the ‘the inventory physical
storage costs per unit’ are not necessarily a linear
function with the average inventory level. For instance,
in places where real estate is costly, it may be
prohibitively expensive, if not impossible, to acquire a
large amount of space. This is pertinent to RMC
facilities as they necessarily have to be located within
travel distance of urban construction areas. In those
cases, a larger and compacted inventory facility is
usually used to save physical plant space. It is also
important to note that the inventory physical storage
costs per unit in the larger-sized inventory facilty are
usually lower than that in the smaller-sized inventory
facility, if the other conditions, for example, rental rate,
utility rate and labour rate are the same. The
production manager interviewed in a RMC batching
plant suggested that if the inventory physical storage
costs per unit in the larger sized inventory facility are
even higher than that in the smaller inventory facility,
‘there is no reason to have a larger inventory facility.
We can simply install a few smaller sized inventory
facilities together to hold the same amount of inven-
tory’. Hence, the assumption made by the authors of
this paper is conservative for the EOQ system when
compared with a JIT purchasing system. Gaither
(1996) also suggested that the inventory physical
storage costs should be included as a component of
the ‘total holding costs’. These eleven assumptions are
further summarized in Table 1.
 412 Wu and Low

Table 1 Assumptions made in this paper

Assumptions made in this paper

Assumptions made in the models of Schniederjans and Cao (2001)
(1) Ordering cost under the EOQ system is fixed per order (Harris, 1915)
(2) Holding cost under the EOQ system for the inventory item is constant on a per unit basis (Harris, 1915)
(3) Total holding costs (excluding the inventory physical storage costs) under the EOQ system are linearly related to the
average quantity held in inventory (Harris, 1915)
(4) Annual demands for the item under the EOQ or JIT purchasing system are known and constant
(5) The unit price per item under the EOQ or JIT purchasing system remains constant
(6) Orders under the EOQ system are arranged in such a way that the succeeding delivery arrives at the time that the
quantity from the previous delivery has just been depleted (Harris, 1915); or ‘safety stock costs required in an EOQ
model are balanced out by other costs incurred in the use of a JIT model’(Schniederjans and Cao, 2001, p. 112).
Hence, safety stock and out-of-stock costs are not considered
(7) The orders under the EOQ system are raised at the optimal economic order quantity (Fazel, 1997)
(8) The materials suppliers of the JIT companies produce and store their products in large batches and respond to the
JIT challenge by delivering them in small qauntities. The carrying and ordering costs (e.g. storage, inspection,
transportation, preparation of purchasing orders for each delivery, etc.) of the JIT company were mainly transferred
Downloaded by [University of Alberta] at 08:56 04 October 2014

to the material suppliers and solely reflected in the unit price to the JIT company. Therefore, the unit price under the
JIT purchasing system, which includes the portion of holding and ordering costs that are passed on the the buyer, is
higher than the unit price under the EOQ system (Fazel, 1997)
(9) Total costs under the JIT purchasing system is the product of annual demand and the unit price minus the annual
facility cost reduction (Schniederjans and Cao, 2001)
(10) The additional benefits of EOQ or JIT purchasing system will not be included in the EOQ–JIT cost difference
mathematical models. These additional benefits of JIT purchasing are ‘the impact of different purchasing policies on
quality and flexibility of operations’ (Fazel, 1997, p. 504). The additional benefit of the EOQ system is its low out-of-
stock costs (Johnson and Stice, 1993)
Assumption made by the authors of this paper
(11) The inventory physical storage costs under the EOQ system, for example, rental, utilities and personnel salaries are
linearly related to the average inventory level. This is to expand the ‘total holding costs’ in the classical EOQ model in
assumption 3 to include the inventory physical storage costs.

This paper will use both theory and industry practice
to demonstrate that even when all the inventory holding
costs which were omitted in the models of Fazel (1997)
and proposed by Schniederjans and Cao (2001) are
included, EOQ can still be more cost-effective than a
JIT purchasing system, even if JIT operation experi-
ences reduction of inventory physical plant space. The
inventory holding costs included are: inventory physical
storage costs, taxes and insurance paid on inventory
item, inventory spoilage and obsolescence costs and the
opportunity costs of working capital tied up in the
purchased inventory. It was therefore concluded that
Schniederjans and Cao’s (2001) analysis appears to be
biased towards the JIT purchasing system while Fazel’s
(1997) analysis appears to be biased towards the EOQ
system.
Break-even point
The break-even point between the function of the annual
holding capacity of an inventory facility and the function
of the EOQ–JIT cost indifference point of Schniederjans
and Cao (2001) can be derived in three steps.
The first step is to modify the function of the EOQ–
JIT cost indifference point derived by Schniederjans
and Cao (2001). The second step is to derive the
function of the annual holding capacity of an inventory
facility. The third step is to derive the break-even point
between the function of the annual holding capacity of
an inventory facility and the function of the EOQ–JIT
cost indifference point.
Step 1: modifying Schniederjans and Cao’s (2001)
EOQ–JIT cost indifference point
Both Fazel’s (1997) and Schniederjans and Cao’s
(2001) EOQ–JIT cost indifference point functions
were based on the classical EOQ model. Based on
assumptions 1–6 and assumption 10 in Table 1, the
total annual cost of the EOQ system, TCE, is the sum of
the inventory ordering cost, inventory holding cost, and
the cost of the actual purchased units, and is given by:
kD Qh
TCE ~ z zPE D ð1Þ
Q 2
where Q is the fixed order quantity, h is the annual cost of
holding one unit of inventory in stock, k is the cost of
 EOQ versus JIT purchasing
placing an order, D is the annual demand for the item, PE
is the purchase price per unit, D/Q is the annual ordering
frequency, and Q/2 is the annual average inventory level
in the inventory facility. The first ratio is the inventory
ordering cost. The second ratio is the inventory holding
cost. The last item is the annual purchasing cost
component. It should be noted that based on assumption
6 in Table 1, the costs of not having stocks are not
considered in Equation 1. Hence, Equation 1 is only a
matching cost of the JIT operation. Although both the
risk of non- or late delivery, and the costs associated with
it, vary from place to place and between industries, these
risks still need to be recognized.
It should also be noted that although Fazel (1997)
and Schniederjans and Cao (2001) used the term ‘the
total annual cost of an inventory item under an EOQ
system’ to refer to ‘TCE’ in Equation 1; the so-called
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‘fixed costs’, for example ‘rental, utilities, and person-
nel salaries’ (Fazel, 1997, p. 501) were excluded from
the inventory holding cost item. This was an important
assumption (assumption 3) in Table 1, made by both
Fazel (1997), and Schniederjans and Cao (2001).
However, as suggested earlier, this assumption can be
expanded to assumption 11 in Table 1 when comparing
an EOQ system with a JIT purchasing system to select
an inventory purchasing approach. This means that the
so-called ‘fixed cost’ can be included into ‘h’ when
selecting an inventory purchasing approach. However,
for the sake of comparing this study with that of
Schniederjans and Cao (2001), the ‘physical plant
space’ factor will still be excluded from ‘h’ and be
treated as a penalty cost of not using JIT, as suggested
by them. This will be demonstrated in the later
discussion. Accordingly, the ‘h’ in this study will be
significantly larger than that in the studies of Fazel
(1997) and Schniederjans and Cao (2001). This will be
demonstrated by the discussions and the case study.
Again, for the purpose of comparing this study to the
studies of Fazel (1997) and Schniederjans and Cao
(2001), the same terminology ‘the total annual cost of
the EOQ system’ will also be used in this study to refer
to ‘TCE’.
By taking the first derivative with respect to Q of
Equation 1 and setting it to equal to zero, the optimum
order quantity, Q*, can be derived as:
rffiffiffiffiffiffiffiffiffi

2kD
Q ~ ð2Þ
h Cao’s (2001). When the floor area saved by adopting
Equation 2 results in a total annual optimal cost under the
EOQ purchasing approach of:
TCE ~
1 pffiffiffiffiffiffiffiffiffiffiffiffi 1 pffiffiffiffiffiffiffiffiffiffiffiffi pffiffiffiffiffiffiffiffiffiffiffiffi ð3Þ
2kDhz 2kDhzPE D~ 2kDhzPE D
2 2
413
It is essential to note that Equation 3 is valid only
when the inventory is ordered at its economic order
quantity, namely, assumption 7 in Table 1 is satisfied.
The implication of this condition is that the annual
inventory ordering cost item, kD Q , equals the annual
inventory holding cost item, Qh
2 as shown in Equation 3.
Under the JIT purchasing system, the holding cost
and ordering cost are mainly transferred to the supplier,
who may also pass (some or all of) them onto the buyer
(Fazel, 1997). The annual inventory facility cost, as
mentioned earlier, is not ‘fixed’ and will go down
during JIT operations (Schniederjans and Cao, 2001).
Hence, based on assumptions 8–10 in Table 1, the total
annual cost under the JIT purchasing system, TCJ, is
the annual purchase cost minus the annual facility cost
reduction (Schniederjans and Cao, 2001), and is given
by:
TCJ ~PJ D{FN ð4Þ
where PJ is the unit price under the JIT purchasing
system, F is the annual cost to own and maintain a
square metre of physical plant space, N is the floor area
of physical plant space saved by adopting a JIT
purchasing system.
To make a comparison between the total costs under
the EOQ system and the JIT purchasing system, a Z
model that combines the total annual optimal cost
under the EOQ system in Equation 3 and the total
annual cost under the JIT purchasing system in
Equation 4 is presented as:
pffiffiffiffiffiffiffiffiffiffiffiffi
Z~ 2kDhzPE DzFN{PJ D ð5Þ
The root of Eq. 5 is similar to the cost indifference
point proposed by Schniederjans and Cao (2001),
given by:
DindSchniederjans&Cao ~
   qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
  ffi
PJ {PE FNzkh z 2 PJ {PE FNkhzk2 h2 ð6Þ
 2
PJ {PE
It is essential to note that DindSchniederjans&Cao is not the
EOQ–JIT cost indifference point proposed by
Schniederjans and Cao (2001), as h in this paper is
substantially greater than that in the equation of the
EOQ–JIT cost indifference point of Schniederjans and
the JIT purchasing system is set to zero, Eq. 6 is
converted as:
2kh
DindFazel ~  2 ð7Þ
PJ {PE
Equation 7 is similar to the EOQ–JIT cost indifference
 414
point arrived at by Fazel (1997), except h in this paper
is substantially greater than that in the equation of the
EOQ–JIT cost indifference point of Fazel (1997).
Equation 7 appears to be biased towards the EOQ
system on two counts. First, the physical plant space
factor is left out. Secondly, other so-called ‘fixed costs’
such as utilities and personnel salaries are also left out
(Schniederjans and Cao, 2001). Because N is the floor
area saved by adopting a JIT purchasing system, it is
reasonable to assume that N is the difference between
the floor area of an inventory facility under the EOQ
system minus that under the JIT purchasing system, or:
N~NE {NJ
where NE is the floor area of an inventory facility under
the EOQ system and NJ is the floor area of an inventory
facility under the JIT purchasing system. Supposing the
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JIT purchasing system is perfectly implemented,
namely, the floor area of the inventory facility under
the JIT purchasing system, NJ, equals zero, then:
N~NE
Substituting N with NE in Equation 6, the cost
indifference point between the EOQ and the JIT
purchasing system is revised as:
Dind ~
   qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
 
PJ {PE FNE zkh z 2 PJ {PE FNE khzk2 h2 ð10Þ
 2
PJ {PE
It is essential to note that Equation 10 is valid only
when NE, the floor area of an inventory facility under
the EOQ system, is great enough to accommodate Dind
amount of inventory. Put another way, Dind, the cost
indifference point, should be less than the annual
holding capacity of an inventory facility. It is this
condition and the expansion of h that differentiate
Equation 10, the revised function of the EOQ–JIT cost
indifference point, from that derived by Schniederjans
and Cao (2001). Substituting the initial size of the
inventory facility, NEo, for NE in Equation 10, yields the
EOQ–JIT cost indifference point at the initial size of an
inventory facility, DindEo:
DindEo ~
   qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
 
PJ {PE FNEo zkh z 2 PJ {PE FNEo khzk2 h2 ð11Þ
 2
PJ {PE
It is essential to highlight that although the term ‘EOQ–
JIT cost indifference point’ is used to refer to
Equation 11, DindEo may not be the cost indifference
point between the EOQ and JIT purchasing system
as NEo, the initial size of the inventory facility, may
Wu and Low
not be capable of accommodating DindEo amount of
inventories.
Step 2: annual holding capacity of an inventory
facility
The formula of the annual holding capacity of an
inventory facility can be derived from two concepts:
‘the holding capacity of an inventory facility’ and ‘the
optimal order quantity’. The holding capacity of an
inventory facility is defined as the amount of inventory
that can be held by the inventory facility at a specific
ð8Þ time when assuming each unit of inventory item takes
up a fixed amount of inventory facility. Assuming each
unit of the inventory item takes up a m2 of the
inventory facility, the holding capacity of an inventory
facility can be derived by dividing the floor area of an
inventory facility by the area occupied by a unit of
inventory, or:
NE
~Qh ð12Þ
ð9Þ a
where Qh is the holding capacity of an inventory facility.
In practice, to allow for flexibility, the size of the
inventory facility is usually designed to be greater than
the size needed to hold the exact amount of optimal
order quantity of inventory. Following assumption 11),
it was assumed that the size of the inventory facility is b
times the size which holds the optimal order quantity
amount of inventory. This results in:
Qh ~bQ
ð13Þ
where b is the stock flexibility parameter. It is important
to stress again that the lower out-of-stock cost is the
major issue in keeping firms on EOQ; hence, b is often
greater than 1. Substituting Equations 2 and 12 into
Equation 13, the annual inventory demand predicted by
the floor area of the inventory facility can be derived as:
hNE2
D~ ð14Þ
2kb2 a2
According to its definition, the annual holding capacity
of an inventory facility, Dh, is the holding capacity of an
inventory facility, Qh, multiplied by the annual inven-
tory ordering frequency, D/Q*, where inventory is
ffi ordered at its optimum order quantity, or:
D
Dh ~Qh ð15Þ
Q

Substituting Equations 13 and 14 into Equation 15,
results in the annual holding capacity of an inventory
facility as:
hNE2
Dh ~ ð16Þ
2kba2
 EOQ versus JIT purchasing 415

For the purpose of flexibility and safety, again, it is YHI is continuous and differentiable as NE the floor
essential to revise the annual holding capacity of an area of the inventory facility is greater than or equal to
inventory facility by dividing Dh by the stock flexibility zero. Taking the first order derivative of YHI with
parameter, b, resulting in: respect to NE, will result in
hNE2 dYHI h F
Dsafe
h ~ ð17Þ ~ 2 2 NE {
2kb2 a2 dNE ka b PJ {PE
Fkh ð21Þ
The value of the right-hand side of Equation 14 is the same { qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
 
as that of Equation 17. However, the meaning is totally PJ {PE 2 PJ {PE FNE khzk2 h2
different. Equation 14 is the inventory annual demand
predicted by the floor area of inventory facility. Taking the second order derivative of YHI in Eq. 20
Equation 17 is the revised annual holding capacity of an with respect to NE, will result in
inventory facility, where flexibility and safety factor have
been considered. Flexibility and safety should be consid- d 2 YHI h
~ 2 2z
ered in practice. Hence, the term ‘the annual holding capa- dNE2 ka b ð22Þ
city of an inventory facility’ in the rest of this paper refers    {3=2
F 2 k2 h2 2 PJ {PE FNE khzk2 h2
to Dsafe in Equation 17, rather than Dh in Equation 16.
Downloaded by [University of Alberta] at 08:56 04 October 2014

h
Substituting the initial size of the inventory facility, NEo, h
Note that ka2 b2 is always positive.
for NE in Equation 17, yields the annual holding capacity F k h [2(PJ2PE)FNEkh+k2h2]23/2 is also always posi-
2 2 2

of an inventory facility at its initial size, DhEo: 2

2 E
hNEo
DhEo ~
2kb2 a2
Based on the function of the annual holding capacity
of an inventory facility, Equation 17, the condition for
Equation 10 to be a feasible EOQ–JIT cost indifference
point, may be mathematically rewritten as:
   qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
 
PJ {PE FNE zkh z 2 PJ {PE FNE khzk2 h2
 2
PJ {PE
hNE2
ƒ
2kb2 a2
Step 3: break-even point
The break-even point between the function of the
annual holding capacity of an inventory facility and the
function of the EOQ–JIT cost indifference point is
(Neq, Deq). Neq is ‘the inventory facility break-even
point’. Deq is ‘the annual demand break-even point’.
Neq is amount of floor area of an inventory facility at
which the function of the annual holding capacity of an
inventory facility equals the function of the EOQ–JIT
cost indifference point. Let YHI represents the differ-
ence between the function of the annual holding
capacity of an inventory facility and the function of
the EOQ–JIT cost indifference point, resulting in:
tive. Hence ddNYHI
2 , the second order derivative of YHI,
with respect to NE is always positive, the curve of YHI is
ð18Þ
concave upwards. Setting NE, the floor area of an
inventory facility to zero, will result in
{2kh
YHI0 ~  2 ð23Þ
PJ {PE
where YHI0 is the difference between the function of the
annual holding capacity of an inventory facility and the
function of the EOQ–JIT cost indifference point when
ð19Þ
the floor area of an inventory facility equals zero. Both
k, the cost of placing an order, and h, the annual
holding cost of one unit of inventory, are positive; YHI0
is thus always negative. As YHI0 always has a negative
value and since the curve of YHI is concave upwards,
there must exist a break-even point at which YHI equals
zero. Setting YHI to zero, the root of Eq. 20 is Neq the
inventory facility break-even point:
2abkðabFzhÞ
Neq ~   ð24Þ
PJ {PE h
Substituting Equation 24 into Equation 17, where NE
the floor area of an inventory facility under the EOQ
system equals Neq the inventory facility break-even
point, yields Deq, the annual demand break-even point:
2kðabFzhÞ2
Deq ~  2 ð25Þ
h PJ {PE

hNE2 It is essential to note that Equations 24 and 25 are

YHI ~ {
2kb2 a2 developed based on Equations 3, 10 and 13. Hence, to
   qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
  ð20Þ apply Equations 24 and 25 to calculate the break-even
PJ {PE FNE zkh z 2 PJ {PE FNE khzk2 h2 point in practice, the assumptions and conditions of
 2
PJ {PE these three equations must be satisfied.
 416 Wu and Low

Ultimate EOQ–JIT cost indifference point
DindWu&Low
The ultimate EOQ–JIT cost indifference point,
DindWu&Low, is defined as the annual demand at which
the inventory can be accommodated by the existing
inventory facility and at which the total annual cost
under the EOQ system equals the total annual cost
under the JIT purchasing system. Having developed
the concept of the annual holding capacity of an
inventory facility and the concept of the break-even
point between the function of the annual holding
capacity of an inventory facility and the function of the
EOQ–JIT cost indifference point, the ultimate EOQ–
JIT cost indifference point, DindWu&Low, can be pre-
sented as:
8 from the models developed by Fazel (1997) which
Downloaded by [University of Alberta] at 08:56 04 October 2014
N5NE and NJ50. The dash and double dotted line
mixed with I represents the ultimate EOQ–
JIT cost indifference points governed by Equation 26.
The implications of Figure 1 are threefold. First,
both DindWu&Low the ultimate EOQ–JIT cost indiffer-
ence point and Deq the annual demand break-even
point are substantially greater than DindFazel. This is
because the savings of inventory holding space under
the JIT purchasing system were not accounted for in
DindFazel (Fazel, 1997; Schniederjans and Cao, 2001). It
is essential to highlight that the EOQ–JIT cost
indifference point proposed by Fazel (1997) is even
less than DindFazel, as suggested earlier. This finding
suggests that the JIT purchasing system can still remain
cost effective even at a high level of annual demand.
Hence, this implication is different from that derived

>
>
> NE §Neq ~ 2abP ðabFzh Þ
> ð J {PE Þh suggest that ‘JIT inventory purchasing was only
<
DindWu&Low ~ ð26Þ preferable at lower level of annual demand’
> pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi (Schniederjans and Cao, 2001, p. 110).
> ½ðPJ {PE ÞFNE zkhz 2ðPJ {PE ÞFNE khzk2 h2
>
>
:
ðPJ {PE Þ
2 Secondly, an inventory facility is not capable of
holding the EOQ–JIT cost indifference point’s amount
where NE is the independent variable, DindWu&Low is the of inventory when the floor area of an inventory facility
dependent variable, and k, h, PJ, PE, F, a and b are is less than Neq the inventory facility break-even point.
constants. The values of k, h, PE, F, a and b are the This is demonstrated by DhEo the annual holding
respective values when inventory is ordered at its capacity of an inventory facility at its initial size, and
optimal order quantity under the EOQ system. The DindEo the EOQ–JIT cost indifference point at its initial
first equation in Equation 26 states that the floor area of size, where DhEo is less than DindEo. DhEo will always be
the inventory facility should not be less than Neq, the less than DindEo as far as the size of an inventory facility
inventory facility break-even point. The second equa- is below Neq the inventory facility break-even point. A
tion in Equation 26 states that the total annual cost of JIT purchasing system may be more cost-effective than
the EOQ system at NE equals the total annual cost of the EOQ system only if the floor area of the inventory
the JIT purchasing system. It is essential to note that facility is below Neq the inventory facility break-even
once the first equation is satisfied, DindWu&Low the
ultimate EOQ–JIT cost indifference point will not
surpass Dsafe
h which is the annual holding capacity of an
inventory facility at NE, nor will DindWu&Low be less than
Deq the annual demand break-even point represented.

Discussion

DindWu&Low, the ultimate EOQ–JIT cost indifference

point, is further illustrated in Figure 1. To compare this
present study with that of Schniederjans and Cao
(2001) and Fazel (1997), DindEo the EOQ–JIT cost
indifference point at the initial size of an inventory
facility, DhEo the annual holding capacity of an
inventory facility at its initial size, DindFazel, and (Neq,
Deq) the break-even point, are all indicated in Figure 1.
The black line represents the annual holding capacity of
an inventory facility governed by Equation 17. The Figure 1 Break-even point between the annual holding
dash and double-dotted line represents the EOQ–JIT capacity of an inventory facility and the EOQ-JIT cost
cost indifference points governed by Equation 6, where difference point
 EOQ versus JIT purchasing
point. It would appear that the floor areas in the cases
observed by Schniederjans and Cao (2001) probably all
fell below Neq the inventory facility break-even point.
Lastly, an inventory facility is capable of accommo-
dating the EOQ–JIT cost indifference point’s amount
of inventory once the floor area of an inventory facility
is above Neq the break-even point. This suggests that
Schniederjans and Cao (2001) may have overlooked
the possibility that an inventory facility could hold an
inventory stock equivalent to the EOQ–JIT cost
indifference point if the floor area of the storage facility
reaches Neq, its break-even point. Put differently, the
EOQ based system can be more cost effective than the
JIT purchasing system even if the JIT operation reduces
inventory storage plant space, provided that the area of
the inventory facility is larger than the break-even point
Neq, or the magnitude of the annual demand is greater
Downloaded by [University of Alberta] at 08:56 04 October 2014
than the break-even point Deq.
It should be stressed again that some costs, capable
of influencing the outcome, have been excluded from
Equations 1, 4, 5, 17 and 19. Strictly speaking, the
EOQ–JIT cost indifference point should be amended
by considering these costs. For example, if there is risk
of non-delivery, and if the JIT operator is risk averse, then
the possibility of unexpected costs would shift the
ultimate EOQ–JIT cost indifference point to a lower
level than that derived from Eq. 26. On the other hand,
the additional benefits of JIT operation such as improved
product quality and increased production flexibility can
shift the ultimate EOQ–JIT cost indifference point to a
higher value than that derived from Eq. 26.
The break-even point, the ultimate EOQ–JIT cost
indifference point and the impact of the annual demand
to the adoption of the inventory’s purchasing
approaches are further illustrated by a survey and a
case study below. The survey covered the ready-mixed
concrete (RMC) industry in Singapore. The case study
was from the cement division of one of the RMC
companies surveyed.
Survey
RMC is a product that is widely used in the
construction of buildings and civil works in the
construction industry. The production of RMC is a
Table 2 Cement purchasing approaches practiced by RMC suppliers in Singapore
RMC suppliers
Material A B C D E F
Cement O O O N N N
Notes: ‘O’ denotes that the raw material is purchased using the JIT purchasing approach. ‘N’ denotes that the raw material is purchased using the
EOQ approach.
417
highly repetitive manufacturing process. Cement, one
of the basic materials for mixing RMC, may be
purchased either using the EOQ approach
(Tommelein and Li, 1999) or the JIT purchasing
approach (Wu and Low, 2003).
To understand the cement procurement approach
taken by RMC suppliers in Singapore, a survey and
intensive site studies were conducted by the authors
from April to July 2002 and from May to December
2003, respectively. The survey covered all the 15
registered members of the Ready-Mixed Concrete
Association of Singapore (RMCAS). These 15 RMC
suppliers were the major players in the RMC market in
Singapore. They were RDC Concrete Pte Ltd, Hanson
Concrete Pte Ltd, Eastern Concrete Pte Ltd, Island
Concrete Pte Ltd, G&W Readymix Pte Ltd, Lafarge
Concrete Pte Ltd, Pan United Concrete Pte Ltd,
Topmix Concrete Pte Ltd, Jurong Readymix Concrete
Pte Ltd, Oriental Concrete Pte Ltd, Trimix Pte Ltd,
Sunway Concrete Products Pte Ltd, Goodmix
Investment Pte Ltd, WP Conc-pact Pte Ltd and
Bilicon Readymix Pte Ltd. The survey results are
summarized in Table 2. Company names are not
specified in Table 2 in order to preserve their anonym-
ity. Nevertheless, the information in Table 2 suffices to
provide an overall picture of the cement purchasing
system adopted by RMC suppliers in Singapore.
Table 2 shows that, among the RMC suppliers
surveyed, approximately 60% of them purchased cement
using the JIT purchasing approach and 40% ordered their
cement using the EOQ approach. These EOQ companies
are companies D, E, F, G and I. The site studies also
found that the cement division of these EOQ companies
also sold cement to the other RMC suppliers.
A commonly cited argument in favor of EOQ is the
ability it gives a firm to take on unexpected orders
(Johnson and Stice, 1993), while a criticism commonly
directed against JIT purchasing is its expensive out-of-
stock costs (Low and Choong, 2001; Singh, 2003).
Table 2, however, suggests that the JIT/EOQ choice
may be less clear-cut at an industry-wide level than it
appears for an individual firm. This is because a RMC
supplier who purchased its cement in a JIT approach
can purchase its cement from the five RMC suppliers
who work on an EOQ approach, when cement is not
available from its JIT cement suppliers and when
G H I J K L M N O
N O N O O O O O O
 418
cement is needed suddenly. It appears that the cement
section of the RMC industry in Singapore as a whole
has settled into a blend of the two systems in which the
JIT methods of some operators are partly sustained by
the large-scale warehousing and EOQ operations of
others.
As mentioned above, the cement stocked by EOQ
companies helps them avoid the expensive out-of-stock
costs. In Singapore’s RMC industry, this is particularly
true during the typhoon seasons. Most of the cement
consumed by the RMC industry in Singapore is
imported from abroad, mainly Japan, Taiwan and
China. These shipments are subject to the vagaries of
typhoons during the spring and autumn seasons. This
is particularly significant because the ordering cost of
this cement is a major component of the overall costs in
the RMC industry. Only five RMC suppliers who are
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engaged in the cement business have their own cement
divisions. Hence the demand volume facing the cement
division in these five RMC suppliers is high. The cost of
holding cement in land-scarce Singapore is also high.
This probably explains why these five RMC suppliers
have built their own silos and procured their cement in
an EOQ based system. This aspect of the industry is
further illustrated in the following case study.
Case study
The cement division of RMC supplier I built two silos
on Pulau Damar Laut island. The designed holding
capacity of each of the silo was approximately
25 000 tonnes. The average area occupied by one silo
was about 2800 m2. The sum of the holding capacities
of the two silos was approximately 40 000 tonnes
(where safety and flexibility factors had been consid-
ered. The stock flexibility parameter was b51.25). As
stated previously, most of the cement consumed in
Singapore’s RMC industry originates abroad. Cement
imported by Supplier I during 2003 came mainly from
Japan at a rate of approximately one 40 000-tonne
cement carrier per month. The annual demand, D, was
520 000 tonnes in 2003. Orders were raised 2–3
months before the departure of each cement carrier
from Japan. Purchasing cement according to the EOQ
model costs PE5S$40/tonne. The annual cost of
holding one tonne of cement was h5S$321/year/tonne.
This holding cost can be broken down into hcheckin
cement check-in cost, hstorage1 and hstorage2 cement
storage costs and hcheckout cement check-out cost. The
cement check-in cost was the depreciation and operat-
ing cost of the facilities to unload cement from a
cement carrier to a silo and hcheckin5S$199/year/tonne.
The cement storage costs were hstorage15S$12/year/
Wu and Low
tonne and hstorage25S$10/year/tonne. The cement
storage costs hstorage1 include the property tax, insur-
ance, cement spoilage cost and opportunity cost of the
working capital tied up in purchased cement. The
cement storage costs hstorage2 include depreciation cost
of the silo facilities, utilities and personnel salaries. The
cement check-out cost was the depreciation cost and
operating cost of the facilities, mainly cement trucks, to
deliver cement from the silo to a RMC batching plant
and hcheckout5S$100/year/tonne. The cost of placing an
order was k5S$432 000/order for transportation alone.
Each tonne of cement took up a50.112 m2/tonne
inventory facility space.
The annual rental cost of a square metre of inventory
facility was F5S$84/year/m2. abF, the annual rental
cost for holding one tonne of cement in stock, is
S$11.76/year/tonne. In contrast, when cement was
purchased under a JIT purchasing system, the cost was
PJ5S$65/tonne. It is essential to note that the data for
this case study were collected by interviewing the
overseas investment manager, the financial manager,
the production manager and the customer service
supervisor of the cement division of supplier I. These
data are not figurative data and are unlike those
demonstrated in the hypothetical examples given by
Fazel (1997, p. 502) and Schniederjans and Cao (2001,
p. 115). It is also important to note that although the
cement division of RMC supplier I ordered its cement
in an EOQ approach, the accounting system adopted
by them did not exactly follow the EOQ system.
However, it was suggested that the cost information
can be structured as above to fit the EOQ model. This
also suggests that the value of each parameter is an
estimated value only.
The annual inventory ordering cost item, kD Q , was
S$5 616 000/year. The annual inventory holding cost,
Qh
2 , was S$6 420 000/year. Based on Equation 2, the
economic order quantity was Q*537 411 tonnes/order.
Hence, the annual inventory ordering cost item, kD Q , was
close to the annual inventory holding cost item, Qh 2 .
The economic order quantity, Q*, was close to the
routine order quantity 40 000 tonnes/order. Conse-
quently, Equation 24 and Equation 25 could be used
to derive the break-even points. Equation 26 can be
used to derive the ultimate EOQ–JIT cost indifference
point. According to Equation 24, the break-even point
represented by the floor area of the inventory facility,
was 5016 m2. According to Equation 25, the break-
even point represented by the annual demand was
476 930 tonnes. Based on Equation 26, the ultimate
EOQ–JIT cost indifference point of ordering cement
represented by the annual demand in the cement
division of RMC supplier I was 480 646 tonnes.
Because the floor area of the two silos, 5600 m2, was
greater than the break-even point, 5016 m2 and
 EOQ versus JIT purchasing
Table 3 A comparison of the EOQ–JIT cost indifference points
Description Fazel’s (1997) model
Cement purchasing EOQ–JIT cost 16 589 (tonne/year)
indifference point
because the ultimate EOQ–JIT cost indifference point,
480 646 tonnes was greater than the break-even point,
476 930 tonnes; therefore, the value of the ultimate
EOQ–JIT cost indifference point was confirmed to be
480 646 tonnes. According to Equation 17, the annual
holding capacity of the two silos was 594 444 tonnes,
which is capable of accommodating 520 000 tonnes of
cement. The annual holding capacity of these two silos
can be as high as 928 818 tonnes, which is substantially
Downloaded by [University of Alberta] at 08:56 04 October 2014
greater than the annual demand in 2003, if the
flexibility parameter b is set to be 1.
If the annual costs of holding one unit of cement, h,
in Equation 7 were replaced by the cement storage
costs, hstorage1, this equation is then converted to be the
formula for calculating the EOQ–JIT cost indifference
point proposed by Fazel (1997, p. 499). According to
Fazel’s (1997, p. 499) formula, the EOQ–JIT cost
indifference point for cement purchasing was
16 589 tonnes/year.
Each tonne of cement occupied at least 0.1 m2 of the
silo. Hence, JIT purchasing of cement can take
advantage of inventory physical plant space reduction.
Based on the models proposed by Schniederjans and
Cao (2001), when ‘saving space and using it to house
additional increasing amounts of inventory to meet
larger annual demand are juxtaposed issues … a JIT
system would virtually always be preferable to an EOQ
system’ (Schniederjans and Cao, 2001, p. 116). Hence,
the EOQ–JIT cost indifference point would be +‘. The
EOQ–JIT cost indifference points worked out from the
models proposed by Fazel (1997), Schniederjans and
Cao (2001) and the authors of this paper are shown in
Table 3.
The batching capacity of the widely used batching
plant was 90 m2/hour in Singapore. The average
demand for cement of the 90 m2/hour batching plant
was approximately 40 500 tonnes/year during 2003 as
estimated by the production manager of the RMC
batching plant division of RMC supplier I. Based on
the survey, each RMC supplier in Singapore had at
least one RMC batching plant. Hence, the annual
cement demand of each of the RMC supplier surveyed
was at least 40 500 tonnes/year. This figure was
significantly greater than the EOQ–JIT cost indiffer-
ence point worked out from the models proposed by
Fazel (1997). Therefore, the EOQ–JIT cost indiffer-
ence point derived from the model of Fazel (1997)
419
Authors’ model Schniederjans and Cao’s
model
480 646 (tonne/year) +‘ (tonne/year)
suggests that all the RMC suppliers should operate in
an EOQ fashion. However, as shown in Table 2, RMC
suppliers A, B, C, H, J, K, L, M, N and O were
purchasing their cement in a JIT fashion. These RMC
suppliers used a number of 100-tonne silos to store
their buffer stock, as shown in Figure 2. The 100-tonne
silos were filled on a daily basis. Hence, the EOQ–JIT
cost indifference point derived from the model of Fazel
(1997) was not supported by the cement purchasing
experience in the RMC industry in Singapore. In the
meantime, the EOQ–JIT cost indifference point model
proposed by Schniederjans and Cao (2001) suggested
that all the RMC suppliers should operate in a JIT
fashion, as cement purchasing can take advantage of
physical plant space reduction. However, the cement
division of RMC suppliers D, E, F, G and I were
purchasing their cement in an EOQ fashion, as shown
in Table 2. To reap economies of scale, the cement
division of these RMC suppliers built a number of huge
multicells silos on the Pulau Damar Laut island, as
shown in Figure 3. The cement received at the Pulau
Damar Laut Island was then delivered to their RMC
batching plant divisions and batching plants of other
RMC suppliers. Hence, the EOQ–JIT cost indifference
point derived from the model of Schniederjans and Cao
(2001) was not supported by the cement purchasing
experience in the RMC industry in Singapore either.
The EOQ–JIT cost indifference point proposed in this
paper was supported by the case study.
It is important to highlight the economies of scale in
cement storage. A representative tonne of cement takes
up approximately 0.115 m2 of floor area in a 100-tonne
silo and approximately 0.109 m2 in a 25 000-tonne silo.
In addition, in terms of the overall throughput, the
annual cost of holding 1 tonne of cement in a 100-
tonne silo is approximately S$330/year/tonne, which is
slightly above S$321/year/tonne; while the annual cost
of holding 1 tonne of cement in a 25 000-tonne silo is
approximately S$312/year/tonne, which is slightly
below S$321/year/tonne. The difference in the con-
struction costs of many small silos as opposed to one
large silo should also be addressed. However, the
construction cost of a silo has already been considered
as a component of the depreciation cost of the silo
facilities. The annual cost of holding 1 tonne of cement
in a cement silo is calculated based on the property tax,
insurance, cement spoilage cost, opportunity cost of the
 420 Wu and Low
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Figure 2 100-tonne cement silos

Figure 3 25,000-tonne cement silos

 EOQ versus JIT purchasing
working capital tied up in the purchased cement, the
depreciation cost of the silo facilities, utilities, person-
nel salaries and the depreciation cost and operating cost
of the facilities to unload cement from a cement carrier
to a silo. The annual cost of holding 1 tonne of cement in a
100-tonne silo is close to that of a 25 000-tonne silo, as
bulk cement must be stored in silos that are waterproof,
clean and protected from contamination, dry (internal
condensation minimized) and with stocks rotated in
chronological order of the dispatch dates marked on
delivery documents (Zacharia, 1985; Singapore
Productivity and Standards Board, 1986; Mao, 1997).
The fact that the annual cost of holding 1 tonne of cement
in a 25 000-tonne silo lies slightly below S$321/year/
tonne can shift the actual EOQ–JIT cost indifference
point to be lower than 480 646 tonne/year. Furthermore,
the actual EOQ–JIT cost indifference point should be
Downloaded by [University of Alberta] at 08:56 04 October 2014
modified to an even lower value, if the out-of-stock cost
was considered. On the other hand, the EOQ–JIT cost
indifference may shift to be greater than 480 646 tonnes/
year if the impact of inventory policy on quality and
flexibility were considered.
One important reference quoted by Schniederjans
and Cao (2001) to support their argument that JIT will
be preferred to an EOQ purchasing approach when JIT
operations reduce physical plant space reduction, was a
study conducted by Pan and Liao (1989). The authors
of this study converted the EOQ model into a series of
JIT purchasing decisions to determine inventory
deliveries and cost savings, and demonstrated that
there was no limit to the cost advantage of using JIT
purchasing based on the model parameter of annual
demand. In the RMC industry this would involve more
frequent but smaller deliveries of cement. The present
authors asked the production manager of the cement
division of supplier I whether or not it would be feasible
to use 2500-tonne cement carriers, rather than 40 000-
tonne cement carriers. The production manager
explained that the transportation of bulk Portland
cement must use specialized transportation vehicles,
such as cement trucks or cement carriers. The
transportation cost of bulk Portland cement from
Japan to Singapore by a 40 000-tonne cement carrier
was about S$10.8/tonne. The transportation cost of
bulk Portland cement from Japan to Singapore by a
2500-tonne cement carrier was about S$20.0/tonne.
The transportation cost of bulk Portland cement in
Singapore by a cement truck was as high as S$0.3/
tonne/km. In addition, the purchase price can rise if
cement is ordered in small lot sizes. The difference
between the selling price, PJ and the purchase price, PE,
was only S$25. The average delivery cost of cement was
around S$4.0/tonne in Singapore, where it was
assumed that the average transportation distance was
between 10 and 20 km, because Singapore is a
421
relatively small island. In addition, the expensive
operating and depreciation costs of the cement silos
and cement check-in facilities must be paid. To sum
up, it was not economically justifiable for the cement
division of supplier I to break down its order size from
40 000 to 2500 tonnes to match the available cement
carriers and to deliver in a JIT pattern.
Conclusions and further study
JIT purchasing of raw materials is one important
technique of the JIT philosophy. However, JIT is not
always more cost effective than the EOQ system. By
developing two new concepts, conducting a survey and
a case study in the RMC industry in Singapore, this
study suggests that when ordering cost is high and
order quantity cannot be economically split, it is
possible for the EOQ system to be more cost effective
than the JIT purchasing system, even if JIT operation
can experience or take advantage of physical plant
space reduction. The two new concepts are: the annual
holding capacity of an inventory facility, and the break-
even point between the function of the annual holding
capacity of an inventory facility and the function of the
EOQ–JIT cost indifference point. The conclusion
derived from the models developed in this paper is
different from that derived from the models of Fazel
(1997), which suggested that ‘JIT inventory purchasing
was only preferable at lower level of annual demand’
(Schniederjans and Cao, 2001, p. 110). The conclusion
derived from the models of this paper also differs from
that derived from the models of Schniederjans and Cao
(2001) which suggested that ‘a JIT system would
virtually always be preferable to an EOQ system’
(Schniederjans and Cao, 2001, p. 116). Importantly,
the models developed in this paper were fully supported
by the industry practices of the RMC industry in
Singapore. The paper concluded that the theoretical
advantages of JIT purchasing may have been overstated
by previous researchers, especially when firms are
purchasing to meet high and consistent levels of
demand and the JIT operation can experience or
take advantage of inventory physical plant space
reduction.
Fazel (1997), Fazel et al. (1998), Schniederjans and
Olsen (1999), and Schniederjans and Cao (2000,
2001) had developed a series of innovative mathema-
tical models to derive the EOQ–JIT cost indifference
point to help companies who were still using the EOQ
approach to consider switching over to the JIT
purchasing approach. However, the material suppliers
who do not act in a JIT pattern were excluded from
their studies. In addition, the models developed in this
 422
paper are based on the classical EOQ model and the
platform created by the previous researchers where
demand variability or the use of safety stock to protect
against it – either in JIT or EOQ are not discussed.
Further investigations to determine the conditions that
give suppliers an economic justification for following a
JIT pattern, and to investigate how demand variability
and the need for safety stock may impact the EOQ–JIT
cost indifference point, are therefore warranted. More
insightful understanding of the impact of these factors
on the EOQ–JIT cost indifference point may then be
achieved by those working towards the full implemen-
tation of the JIT philosophy in the industry.
Acknowledgement
Downloaded by [University of Alberta] at 08:56 04 October 2014
The authors would like to thank the three anonymous
referees for their insightful comments and very helpful
suggestions.
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