4.2 Inventory management
- Syllabus
- 9609–2026–2027
- Topic
- 4.2
- Level
- AS
Learning objectives
4.2.1Managing inventory• Managing inventory- the purpose of inventory within a business (raw materials, work in progress, finished products)- the costs and benefits of holding inventory- buffer inventory, re-order level and lead time- interpretation of simple inventory control charts- the importance of Supply Chain Management4.2.2Just in Time (JIT)• Just in Time (JIT)- the purpose of JIT and JIC (Just in Case) inventory management- the impact of adopting a JIT approach on a business
Inventory control balances continuity against cash, cost and risk
| Inventory type | Purpose | Example of disruption if unavailable |
|---|---|---|
| Raw materials/components | Inputs waiting to enter production | Production cannot start or continue |
| Work in progress (WIP) | Part-completed output between stages | A later stage becomes idle |
| Finished goods | Completed output waiting for sale/delivery | Demand cannot be met promptly |
| Benefits of holding inventory | Costs/risks of holding inventory |
|---|---|
| Meet expected or unexpected demand; avoid lost sales; keep production running through delivery delays; support seasonal demand; gain bulk discounts | Cash/working capital tied up and its opportunity cost; storage, labour, security and insurance; damage, theft, spoilage, depreciation or obsolescence; excess stock and disposal waste |
Buffer inventory is extra/minimum stock held against uncertainty. Reorder level is the inventory quantity that triggers a new supplier order. Lead time is the time between placing that order and receiving it. A longer or less reliable lead time, faster usage or more variable demand usually requires an earlier reorder or larger buffer.
Read a simple inventory-control chart in sequence: (1) the downward line shows inventory being used; its gradient shows usage rate, (2) when stock reaches the reorder level an order is placed, (3) stock keeps falling during lead time, ideally no lower than the buffer/minimum level, (4) delivery makes the line rise by the order quantity, towards the maximum level. Calculate lead time from the horizontal gap between order and delivery; calculate order quantity from the vertical rise on delivery.
Supply chain management (SCM) coordinates the flow of materials, information, goods and services from suppliers, through operations and storage, to distribution and customers. Supplier choice/relationships, purchasing, quality, inventory, production, transport, delivery and returns must align so the right item reaches the right place, time, quantity and condition. Effective SCM can reduce delays, errors, inventory and cost while improving quality, flexibility and customer service; poor coordination can stop production, raise cost and damage loyalty/reputation.
Reorder level is not the point when new stock arrives: stock continues to fall during lead time. Maximum inventory is not automatically optimal, and SCM covers the whole connected flow—not only suppliers or warehousing.
JIT trades inventory protection for precise, reliable coordination
| System | Purpose and operation | Strongest fit | Main exposure |
|---|---|---|---|
| Just in Time (JIT) | Inputs arrive shortly before use and output is produced in response to demand, so little inventory is stored | Predictable demand/processes, short lead times, dependable quality and close, reliable suppliers/information | A late/defective delivery or demand surge can cause stockouts, idle resources, delay and lost sales |
| Just in Case (JIC) | Buffer inventory is held in advance to protect against uncertain demand, delivery or disruption | Long/unreliable lead times, volatile demand, critical continuity, bulk/seasonal buying | Cash is tied up and storage, waste, damage, obsolescence and excess-stock risks rise |
Adopting JIT can reduce warehouse space, handling, insurance, deterioration/obsolescence and waste; release working capital; avoid overproduction; and expose process/quality problems for correction. Lower cost and faster, demand-led flow may improve efficiency, cash flow, margin and competitiveness.
JIT may require technology, forecasting, training and frequent small orders/deliveries; this can raise administration and transport cost and lose bulk discounts. Dependence on supplier quality/timing and accurate demand data means disruption can stop production, lengthen customer lead time, leave labour/capital idle and reduce sales, loyalty and profit.
Evaluate the scale of savings against the expected cost of failure. Test demand volatility, perishability/obsolescence, order variety, supplier number/location/reliability, lead time, transport risk, quality, bargaining relationships, coordination technology, continuity needs and available contingency. A hybrid may use JIT for predictable low-risk inputs and buffer/JIC stock for critical or uncertain items.
A car repairer covering many models may save storage cash under JIT, but if customers value 24-hour repairs and a specialist part is delayed, lost loyalty may outweigh that saving. Reliable local suppliers or a small buffer of critical fast-moving parts changes the judgement.
JIT is an inventory-management system based on timing and demand—not merely ‘zero stock’. It does not remove inventory or supply-chain risk; it shifts protection from stored stock to information, quality, supplier reliability and contingency.