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9609 · 4.2.1

Managing inventory — practice questions

Practice and worked examples for 9609 Managing inventory. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

Component reorder level is 500 units; daily use 100; supplier lead time 4 days. Explain buffer stock logic. Weekly holding cost is $200 for average 800 units held. A stock-out stops production costing $5,000/day. Evaluate holding extra buffer stock of 200 units.

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Without buffer: 100 × 4 days = 400 used in lead time — reorder at 500 may be too late if demand spikes.

Buffer 200: Reorder triggers earlier → lower stock-out risk.

Cost: Extra holding ~$50/week (proportional) vs $5,000/day shutdown — buffer easily justified for this component.

Counter: If supplier is very reliable and JIT feasible (4.2.2), buffer may be waste.

Worked example 2

A furniture manufacturer, 'Oak Designs', uses a specific type of wood screw. Usage varies between 90 and 150 packs per day, with an average of 120 packs. The lead time for a new delivery is between 5 and 7 days. The cost per pack of screws is $25, and the annual cost of holding one pack in inventory is estimated to be 20% of its value. Calculate: a) The buffer stock level. b) The re-order level. c) The annual cost of holding the buffer stock.

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a) Buffer Stock Calculation This is the stock needed to cover delays or usage spikes.

  • Formula: (Max Daily Usage × Max Lead Time) - (Average Daily Usage × Average Lead Time)
  • Calculation: (150 packs × 7 days) - (120 packs × 6 days)
  • = 1050 - 720
  • Buffer Stock = 330 packs

b) Re-order Level Calculation This is the stock level that triggers a new order.

  • Formula: (Max Daily Usage × Max Lead Time)
  • Calculation: 150 packs × 7 days
  • Re-order Level = 1050 packs
  • (Note: This ensures that even with maximum usage and maximum delay, the firm will not run out before the new stock arrives. The stock would fall from 1050 to the buffer level of 330 during the lead time if average usage and lead time occur: 1050 - (120*6) = 1050 - 720 = 330.)

c) Annual Cost of Holding Buffer Stock This is the cost of keeping the safety stock for one year.

  • Step 1: Calculate holding cost per unit.
  • Holding Cost = 20% of 25=0.20×25 = 0.20 \times 25 = $5 per pack per year.
  • Step 2: Calculate total annual cost for buffer stock.
  • Total Cost = Buffer Stock × Holding Cost per unit
  • Calculation: 330 packs × $5/pack
  • **Annual Cost = 1,650∗∗1,650**
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