1
3 marks
Explain one reason why a business might choose to hold low levels of inventory.
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Inventory Management (Cambridge (CIE) A Level Business): Exam Questions
Exam code: 9609
2 hours18 questions
2
2 marks
Case Study
Quality Furniture (QF)
QF is a public limited company in country S. It manufactures furniture for cafés. The number of cafés in country S has increased by more than 50% over the last 5 years. This has meant that QF has been able to expand and achieve internal economies of scale. However, the growth of the café market has attracted new firms supplying café furniture and increased competition for QF.
An extract from QF’s income statement is shown in Table 1.1.
Table 1.1: Extract from QF’s income statement for 2020
$m | |
Revenue | 300 |
Cost of sales | 120 |
Gross profit | 180 |
Expenses | 150 |
Although QF has been successful so far, Javid, the Managing Director, has identified two problem areas: inventory and human resources.
Inventory
QF’s inventory includes raw materials, work in progress and finished tables and chairs. QF buys 80% of its materials from country T and there is a long delivery lead time. This means that QF holds a high level of buffer inventory which has a high value.
Human resources
QF’s production employees are unhappy that they have not received any benefit from the company’s expansion. Profit has doubled over the past three years but employees have not received any pay increases or bonuses. The employees have all been trained by QF and have specialist skills which had ensured that customer expectations were met. However, customers are starting to complain about a fall in the quality of the furniture, which could be the result of the low morale of the employees. Some highly trained employees have left QF to work for competitor firms.
Define the term ‘buffer inventory’.
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3
3 marks
Explain why it is important for a manufacturing business to manage its inventory effectively.
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4
2 marks
Define the term 'supply chain management'.
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5
3 marks
Case Study
Aldworth Carpets
Aldworth Carpets manufactures carpets in country N. It buys wool from four suppliers based in three different countries. Last year one of those suppliers delivered late on three occasions, halting production for a total of nine days.
Explain one reason why supply chain management is important for Aldworth Carpets.
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6
2 marks
Define the term 're-order level'.
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7
3 marks
Case Study
Medlock
Medlock supplies medical consumables to clinics in country B. Its inventory control chart for surgical gloves shows a maximum inventory level of 8 000 boxes, a re-order level of 3 000 boxes, buffer inventory of 1 000 boxes and a lead time of two weeks.
Demand has recently risen from 500 boxes per week to 900 boxes per week.
Explain one change Medlock should make to its inventory control following the rise in demand.
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8
2 marks
Define the term 'Just in Case'.
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9
3 marks
Case Study
Frostfield
Frostfield produces ice cream in country V. Demand more than triples during the summer months. It is considering moving to Just in Time delivery of cream and packaging, with daily deliveries from a supplier 200 km away.
Explain one risk to Frostfield of adopting a Just in Time approach.
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10
3 marks
Case Study
Netherby Windows
Netherby Windows manufactures double-glazed windows in country K and holds a buffer inventory of 300 glass panes. Its glass supplier is reliable but delivers only once a fortnight, and a broken pane cannot be replaced quickly.
Explain one benefit to Netherby Windows of holding buffer inventory.
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1
8 marks
Analyse the importance of inventory management to a retail business.
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2
8 marks
Analyse two benefits to a business of holding high levels of inventory.
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3
8 marks
Case Study
Motorcycle Components (MC)
MC is a large public limited company that produces a range of components used by motorcycle manufacturers. MC’s mission statement is ‘to be the world leader in delivering quality motorcycle components to our customers’.
The motorcycle component industry is very competitive and MC’s customers expect high quality and a short lead time. MC operates a Just in Time (JIT) inventory control system. MC’s good relationships with its suppliers ensure that JIT operates efficiently. The production workers at MC are highly skilled and the business benefits from a low labour turnover.
Liquidity management is very important in the motorcycle component industry. The industry average for the acid test ratio is 1. A summary of some key data for MC has been prepared by the Finance Director, as shown in Table 2.1.
Table 2.1: Summary financial data as at 30 April 2022 ($ million)
Trade receivables | 26 |
Cash | 19 |
Inventory | 1 |
Trade payables | 30 |
Other current liabilities | 20 |
The Operations Director, Jay, is proposing new capital expenditure of $4 million. Jay thinks that automation of the production process will have significant financial benefits for MC. He wishes to gain approval from the Board of Directors to implement a process innovation project. Jay believes that, with good communication and the involvement of employees, he can effectively manage the project.
Analyse two benefits to MC of Just in Time (JIT) inventory control.
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4
8 marks
Case Study
Flight Food (FF)
FF is a large secondary sector business that supplies airlines with in-flight meals. Meals are manufactured using batch production. A different variety of meal is made each hour with a five minute changeover time between batches. FF makes use of Just in Time (JIT) to manage inventory wherever possible. Trucks arrive each hour and deliver the materials needed for production.
The market for airline meals is very competitive. FF uses market segmentation when deciding which meals are most likely to appeal to different airlines. FF must adapt to changes in tastes and the demands of each airline.
FF is a labour intensive business. The workers are employed with short-term (six month) employment contracts. They are only offered new contracts if they meet their production targets. Table 2.1 shows some production data for FF’s two work teams.
Table 2.1: Worker data for FF
Team A | Team B | |
Number of workers | 100 | 50 |
Productivity (per worker per day) | 300 meals | 240 meals |
The Board of Directors of FF is considering changing the manufacturing process to flow production. This would require purchasing Computer Aided Manufacturing (CAM) equipment and using a capital intensive production process. Production targets would no longer be used for employees because the machinery would be set at a specific production rate.
Sabrina, the Operations Director, has put forward the following advantages for moving to flow production:
more products made each hour
lower employment costs
improved quality.
Ben, the Human Resource Director, is worried about the change from a labour intensive process to a capital intensive process.
Analyse two possible disadvantages for FF of using Just in Time (JIT) to manage inventory.
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5
8 marks
Case Study
Calderbrook
Calderbrook is a medium-sized business in country H that manufactures replacement parts for agricultural machinery. It supplies farm equipment dealers, who fit the parts for farmers during the harvest season. Demand is highly seasonal, with over 60% of annual sales falling in a ten-week period.
Calderbrook currently uses a Just in Case system, holding substantial inventory of both steel and finished parts. The Finance Director, Anya Bell, has calculated that inventory holding costs reached $410 000 last year. She argues that this capital is tied up unproductively and wants to move to Just in Time.
Calderbrook buys steel from two suppliers. One is 40 km away and delivers within a day. The other is overseas and has a lead time of six weeks, but charges 18% less per tonne.
Table 1: Selected data for Calderbrook, 2025
Inventory holding cost | $410 000 |
Value of orders lost through stock-outs | $95 000 |
Lead time, domestic supplier | 1 day |
Lead time, overseas supplier | 6 weeks |
Share of annual sales in harvest period | 62% |
The Operations Director, Ravi Chandra, disagrees with Anya. He points out that a farmer whose machine breaks down during harvest needs the part the same day and will buy from a competitor if Calderbrook cannot supply it. Calderbrook has also been approached by two new dealers who want firm assurances on availability before signing.
The directors must decide before the next harvest season begins.
Analyse two advantages to Calderbrook of continuing to use Just in Case rather than moving to Just in Time inventory management.
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1
12 marks
Discuss the importance to a hotel of having effective inventory control.
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2
12 marks
Read the following extract before answering
Evaluate whether introducing Just in Time (JIT) will be sufficient to solve the inventory problems at TK.
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3
20 marks
‘Effective inventory management is the most important function of the operations management department in a manufacturing business.’
Discuss the extent to which you agree with this view.
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