EOQ in a Just in Time (JIT) World: An Empirical Analysis of the Impact of EOQ Variables on Operating Profit: The Case of Nigerian Bottling Company Plc

Abstract

With today’s uncertain economy, companies are searching for alternative methods to keep ahead of their competitors by effectively driving sales and by cost reduction. Big manufacturing companies – as well as other companies, do not stand a chance in today’s environment if they do not have an appropriate inventory control model intact. The Economic Order Quantity (EOQ) and Just in Time (JIT) have been used for many years, but yet some companies have not taken advantage of it. An Economic order quantity could assist in deciding what would be the best optimal order quantity at the company’s lowest price. Similarly JIT focuses on providing customers with stocks at the right time and with the right quantity thereby reducing in process inventory and carrying costs and maximizing profits at the same time (Gonzalez and Gonzalez, 2010). All these in place in any organization are known as its inventory management system which invariable needs to be as efficient as possible in other to reduce costs and translate in profit maximization. In recent times there has been a clarion call to abandon EOQ model in place of JIT.  Perhaps this is because of the perceived benefits of JIT which includes:  time reduction as well as improved flow of goods from warehouse to shelves which in turn leads to regular replenishment of stock amongst others.  However, one might be tempted to ask: is this call for abandonment justifiable? Using JIT does it actually reduce costs as well as lead to profit maximization in the organization?. This study looks at the relevance of EOQ Variables – Cost of goods purchased and overheads in impacting on the profitability of the firm. In doing this,  the relationship of increase in cost of goods purchased against Operating profit  as well as increase in Overhead against Operating profit  of  manufacturing  companies in Nigeria were compared. Using Nigerian Bottling Company (NBC) Plc as a case study, Twenty – Nine (29) Years financial statements (1980-2009) were analyzed and the relationships between these variables were compared using regression analysis.  It was found out that there is a relationship amongst these variables in NBC PLC.  This paper thereafter, suggests that rather than abandon EOQ for JIT, they should complement each other for effective inventory management and ultimately lead to profit maximization.

Keywords: Economic Order Quantity (EOQ), EOQ Variables, Just In Time (JIT), Nigerian Bottling Company Plc and Regression Analysis.