Inventory control, buffer inventory and JIT

The inventory control diagram

The diagram plots inventory level against time in a saw-tooth pattern:

• Maximum inventory level: the most the firm wants to hold.
• Buffer (minimum) inventory: a safety level kept in case of late deliveries or unexpected demand.
• Re-order level: when inventory falls to this point, a new order is placed.
• Lead time: the time between placing an order and its delivery.
• Re-order quantity = maximum level - buffer level (the amount ordered each time, arriving just as inventory reaches the buffer).
• Re-order level = buffer inventory + (usage per period x lead time).

The October 2024 WBS12 paper asked for a re-order quantity calculated as maximum minus minimum inventory.

Reading an inventory control diagram

Poor inventory control

• Too much: cash tied up (worse liquidity), storage and insurance costs, risk of theft, damage, going out of date or out of fashion (waste).
• Too little: stock-outs, lost sales, idle production lines, unhappy customers, rushed and expensive emergency orders.

Just in time (JIT)

JIT means materials arrive exactly when needed for production and finished goods are made to order, so little or no buffer inventory is held.

• Benefits: frees cash and space, cuts storage costs and waste, highlights problems quickly.
• Drawbacks: depends on reliable suppliers close by; a late delivery or transport strike stops production; loses bulk-buying discounts; more frequent orders raise admin and delivery costs; cannot meet sudden surges in demand.

Waste minimisation and lean production

Lean production aims to use as few resources as possible: less inventory, less space, less time, less waste of materials and effort. Methods include JIT, kaizen (continuous improvement), cell production and quality at source. Waste minimisation covers reducing defects, overproduction, waiting time, unnecessary movement and excess inventory.

Competitive advantage: lower costs, faster response to customers, better quality, and an environmentally friendly image.

Worked example

Use the figures in step 1. Explain what happens if a delivery is 2 days late.

1. The order is placed at 650 units; over the 3-day lead time 450 units are used, leaving the buffer of 200 when the delivery should arrive.
2. A 2-day delay needs another 150 x 2 = 300 units, but the buffer holds only 200.
3. The buffer lasts 200 / 150 = 1.3 days, so the firm runs out and is 100 units short before the delivery arrives.

Answer: The buffer covers only about 1.3 days of delay, so production stops (or sales are lost) for the rest of the 2 days; covering a 2-day delay would need a buffer of at least 300 units.

Check yourself

1. Golcar Fisheries holds a maximum of 12 sacks of potatoes and a minimum of 2 sacks (WBS12, October 2024). Calculate the re-order quantity.
   Show answer

   10 sacks. Maximum - minimum = 12 - 2 = 10 sacks, as in the mark scheme.

2. Buffer inventory is 300 units, usage is 80 units a day and the lead time is 5 days. Calculate the re-order level.
   Show answer

   700 units. 300 + 80 x 5 = 700 units.

3. Inventory is at the re-order level of 900 units and usage is 120 units a day. Buffer inventory is 300 units. What is the lead time in days?
   Show answer

   5 days. (900 - 300) / 120 = 5 days.

4. A shop holds a buffer of 360 units and sells 45 units a day. For how many days could the buffer alone cover a late delivery?
   Show answer

   8 days. 360 / 45 = 8 days.

5. Buffer inventory is held mainly to
   • take advantage of higher prices later
   • reduce storage costs
   • improve the acid test ratio
   • protect against late deliveries or unexpected demand
   Show answer

   protect against late deliveries or unexpected demand. It is a safety stock.

6. Which is a disadvantage of just in time inventory?
   • More cash is tied up in inventory
   • Production stops if a supplier delivers late
   • Storage costs rise
   • More inventory goes out of date
   Show answer

   Production stops if a supplier delivers late. No buffer means no protection.

7. Lean production aims to
   • hold as much inventory as possible
   • maximise the number of workers
   • make every product by hand
   • minimise the use of resources and waste
   Show answer

   minimise the use of resources and waste. Do more with less.

8. Explain one drawback of holding too much inventory.
   Show answer

   It ties up cash that could be used elsewhere, worsening liquidity, and increases storage costs and the risk of goods becoming damaged, obsolete or out of date.. Cash tied up, storage costs, risk of waste or obsolescence.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Business specification (2018)
• Pearson Edexcel IAL Business WBS12 Unit 2 mark scheme, October 2024

Last updated 8 November 2026. Spotted a mistake? Tell us.