Modelling the out-of-stock risk and the EOQ-JIT cost indifference point

Abstract

The most important advantage of an economic order quantity (EOQ) system is its ability to handle the unexpected demand. A model for comparing the inventory costs of purchasing under the EOQ system and the just-in-time (JIT) order purchasing system in existing literature concluded that JIT purchasing was virtually always the preferable inventory ordering system. By expanding the classical EOQ model, taking into account out-of-stock risk, which was not considered by previous researchers, this paper shows that it is possible for an EOQ system to be more cost effective than a JIT system when the out-of-stock risk associated with the JIT purchasing system is high or the annual demand is either too low or too high.