Inventory management
Inventory
- Inventory (stock) is the goods a firm holds: raw materials, part-finished, and finished goods.
- Held so the firm can keep producing and meet orders quickly.
- But holding costs (storage, insurance, tied-up money) and the risk of damage/going out of date. Holding too little risks running out.
Practice
A cost of holding too much inventory is:
Holding stock costs storage, insurance and ties up cash; holding too little risks running out.
Inventory control charts
- re-order level — stock level that triggers a new order.
- lead time — time from ordering to receiving.
- buffer inventory — a safety minimum kept for delays/extra demand.
- maximum inventory — the most the firm wants to hold.
Practice
The lead time is the time between:
Lead time is from placing an order to receiving the stock.
JIT vs JIC
- just-in-time (JIT) — stock arrives only as needed: cuts holding costs and waste, but a late delivery stops production.
- just-in-case (JIC) — extra stock held in case of problems: safer but costs more to store.
Practice
A drawback of just-in-time (JIT) is that:
JIT holds almost no stock, so any delivery delay halts production; JIC is safer but costs more.
You've got it
Key idea
- inventory lets a firm keep producing, but holding costs + risk; too little → run out
- chart terms: re-order level, lead time, buffer inventory, maximum inventory
- JIT = minimal stock (cheap, risky); JIC = extra stock (safe, costly)