Answer to Question #168701 in Finance for Syed Mudassir Abbas

Question

a) Briefly describe the following techniques for managing inventory: ABC system, economic order quantity (EOQ) model, just-in-time (JIT) system.

Answer 1

ABC system divides an inventory into three categories —"A items" with very tight control and accurate records, "B items" with less tightly controlled and good records, and "C items" with the simplest controls possible and minimal records.

Economic order quantity (EOQ) is the ideal order quantity a company should purchase to minimize inventory costs such as holding costs, shortage costs, and order cost. The formula assumes that demand, ordering, and holding costs all remain constant.

The just-in-time (JIT) inventory system is a management strategy that aligns raw-material orders from suppliers directly with production schedules. It is a strategy to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs.