Unit 4.7 — Inventory management
Learning outcomes (from the 9587 syllabus). This note is complete when every bullet below is covered.
Learning outcomes
- Inventory: types of inventory; importance; costs and benefits of holding inventory
- Inventory control methods: inventory control charts (maximum inventory level, reorder level, minimum/buffer inventory level, reorder quantity, lead time); Just-In-Time (JIT) — operation, benefits and limitations
Running example: Swift Logistics keeps packaging materials and spare van parts in stock — how much should it hold?
Big picture
In plain English: inventory (stock) is the materials and products a business holds. Holding stock costs money, but running out also costs money — so businesses must find the right balance.
Analogy: inventory is like the food in your fridge. Too much → waste and cost; too little → you run out when guests arrive. A good system keeps just the right amount.
Core content
1. Inventory: types, importance, costs and benefits
Types of inventory:
- Raw materials — inputs not yet used (packaging, spare parts).
- Work-in-progress — partly finished goods.
- Finished goods — completed products ready to sell.
Importance: inventory allows a business to meet demand without delays and to keep production running smoothly.
Costs of holding inventory: storage and insurance, tied-up capital (money stuck in stock), spoilage/obsolescence, handling.
Benefits of holding inventory: buffer against demand or supply shocks, bulk-buying discounts, smooth production, and no lost sales from stock-outs.
Swift holds packaging and spare parts (raw materials). Holding them ties up cash and needs warehouse space (cost), but it means Swift can always pack parcels and fix vans immediately (benefit). The balance is the key decision.
2. Inventory control charts
An inventory control chart shows how stock levels change and when to reorder:
| Term | Meaning |
|---|---|
| Maximum inventory level | The most stock the business will hold |
| Reorder level | The stock level at which a new order is placed |
| Minimum (buffer) inventory level | Safety stock held for emergencies |
| Reorder quantity | How much is ordered each time |
| Lead time | The time between placing an order and receiving it |
Swift’s chart: maximum 1,000 boxes of packaging; when stock falls to the reorder level of 400, it orders the reorder quantity of 600 boxes. During the lead time (3 days), stock keeps falling but never below the buffer level of 100, so Swift never runs out.
3. Just-In-Time (JIT)
JIT = holding minimal inventory, with supplies arriving just in time for use.
- Operation: the business orders small, frequent deliveries linked to demand, keeping stock near zero.
- Benefits: lower holding costs, less capital tied up, less waste/spoilage, less storage space.
- Limitations: depends on very reliable suppliers; no buffer against sudden demand spikes or supply delays; needs accurate demand forecasting.
A JIT manufacturer receives components hours before assembly, saving warehouse costs. But if its supplier’s lorry is delayed, the whole line stops — which is why JIT needs dependable suppliers and accurate forecasts.
Analysis & evaluation points (AO3/AO4)
- Holding vs stock-out is a trade-off — too much stock wastes money; too little risks lost sales.
- JIT is efficient but fragile — it cuts costs yet leaves no safety net against disruptions.
- Buffer stock protects against uncertainty but adds holding cost — the right buffer depends on how predictable demand and supply are.
- Lead time matters — longer or unreliable lead times force a business to hold more buffer stock.
Language bank: however · on balance · it depends on · trade-off ·
Worked examples (PEEL)
PEEL = Point → Explain → Example → Link. Use this structure for every written answer.
Worked example 1 — “Explain” (6 marks)
Question: Explain one cost and one benefit of holding inventory.
- P (Point): Holding inventory ties up capital.
- E (Explain): Money spent on stock cannot be used elsewhere, and storage, insurance and spoilage add further costs.
- E (Example): Swift’s warehouse of packaging ties up cash and needs rent.
- L (Link): This reduces liquidity and raises costs.
- P (Point): However, inventory prevents stock-outs.
- E (Explain): Having stock on hand means the business can always meet demand, avoiding lost sales and unhappy customers.
- E (Example): Swift’s spare parts let it fix vans the same day instead of losing deliveries.
- L (Link): So some inventory is worth the cost.
Worked example 2 — “Evaluate” (10 marks)
Question: Evaluate whether a business should adopt Just-In-Time inventory management.
- P (Point): JIT cuts holding costs.
- E (Explain): With minimal stock, the business spends little on storage, insurance and tied-up capital, and less stock is wasted or spoiled.
- E (Example): A JIT manufacturer needs almost no warehouse and has little obsolete stock.
- L (Link): This lowers costs and improves cash flow.
- Evaluate (AO4): However, JIT leaves no buffer — a single late supplier stops production. For businesses with unpredictable demand or unreliable suppliers, holding buffer stock is safer. On balance, JIT suits stable, high-volume operations with reliable suppliers, but risky environments need more buffer.
Application bank (Singapore quick reference)
| Idea | Singapore example |
|---|---|
| Inventory control | Supermarkets monitoring stock and reordering automatically |
| JIT | Electronics manufacturers receiving parts just in time |
| Buffer stock | Pharmacies and hospitals holding safety stock of essential medicine |
| Warehousing | E-commerce firms (Shopee/Lazada sellers) managing fulfilment stock |
Exam technique
- How it appears: a case study gives an inventory control chart and asks you to interpret it, or asks about JIT.
- Model skeleton for “interpret a chart”: identify the max, reorder, buffer levels, reorder quantity and lead time → explain what happens at each point.
- Common pitfalls: confusing reorder level with reorder quantity; ignoring lead time; recommending JIT without noting its risks.
Self-test checklist
Essay practice: “Evaluate the view that holding buffer stock is essential for every business.” (25 marks)