Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed
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| Points to stress The EOQ model trades off order costs versus carrying costs, assuming that there are no stockouts. One reason for there being no stockouts is the existence of sufficient safety stock. Safety stock calculations trade off stockout costs versus carrying costs. Quantifying the opportunity cost component of stockout costs is necessarily subjective. A stockout may cause the loss of a whole series of orders, particularly if the customer uses JIT and ends up switching to another supplier. Estimation of EOQ models and safety stock levels requires data that most accounting systems do not routinely provide. In this case, the accountant must do a special analysis to estimate the opportunity cost of capital invested in stock and the lost CM from current and future sales lost due to stockouts. JIT adopters often strive to minimise global rather than local costs by employing total value- chain analysis (one of the five management themes introduced in Chapter 1). Suppliers and customers are considered as part of the value chain. In evaluating and choosing suppliers, quality and timely delivery become increasingly important as the emphasis shifts away from minimising purchase costs and towards minimising costs across the entire value chain (e.g. minimising the sum of production costs, warranty costs, opportunity costs from lost current or future sales due to quality or delivery problems, etc. When a customer adopts JIT, the supplier’s reaction will depend on the supplier’s manufacturing process. If the supplier has already adopted (or is about to adopt) JIT, then the supplier is likely to prefer JIT customers. These customers want frequent small deliveries, which help smooth the supplier’s production. In contrast, if the supplier is a traditional large-batch manufacturer, it will be costly to deliver many small orders, unless the supplier also streamlines production. This explains why large JIT customers often encourage their major suppliers to adopt JIT. The EOQ model discussed in relation to purchasing from outside suppliers can also be used to determine optimal batch size by recognising that manufacturing setup costs are analogous to ordering costs. Download 1.72 Mb. Share with your friends:
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