Inventory Management (Cambridge International A-Level Business): Exam Questions

Explain one reason why a business might choose to hold low levels of inventory.

[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’.

Explain why it is important for a manufacturing business to manage its inventory effectively.

Define the term 'supply chain management'.

[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.

Define the term 're-order level'.

[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.

Define the term 'Just in Case'.

[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.

[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.

Analyse the importance of inventory management to a retail business.

Analyse two benefits to a business of holding high levels of inventory.

[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.

[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.

[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.

Discuss the importance to a hotel of having effective inventory control.

Extract:

Thierry’s Kitchen (TK)

Thierry’s Kitchen (TK) operates in four European countries with its head office in country H. TK was started by Thierry Radelet in 2017, after he gave up a senior management role in a food delivery company to start his own business. Thierry had observed the rise in popularity of delivery of cooked meals to offices and households. He identified a gap in the market for an efficient service, which would focus on high‑quality cooked meals for delivery only. TK grew quickly and converted to a public limited company in 2019. TK now has two kitchens in each of four European capital cities. The eight locations are outside the city centres and each kitchen has the capacity to produce 2200 meals each day. Meals are packaged and then delivered to customers by motorcycle. Thierry works at the company’s head office, attached to TK’s first kitchen location in country H. He visits the other kitchens once every month. Thierry and a team of directors make all the major decisions about the main menu items and new locations. Each kitchen has a manager who is responsible for decisions about inventory management and human resources. TK has financed its growth through retained profits and a loan of $15 million. Dividend payments to shareholders have been consistently above average for the catering industry. External environment The European countries in which TK operates experienced economic recessions during 2020. There has been economic growth since then. Governments have supported recovering economies with grants and loans to small and medium‑sized businesses, including TK. Social and technological changes have included fewer consumers eating at restaurants. Smartphone apps are increasingly used for online shopping and ordering meal deliveries. More employees are now working from home rather than in offices. The populations of European capital cities include significant numbers of young, professional individuals who earn above average incomes. Marketing TK differentiates its meal service from the increasing number of competitors on the basis of choice, quality and packaging. The menu is varied and includes daily special offers. Consumers are assured of the high‑quality of TK’s meals as it provides a complete service; from sourcing ingredients to cooking, packaging and delivery. TK’s Operations Director has worked closely with a packaging company to research, develop and patent a range of recyclable packaging containers that ensure meals arrive hot and in excellent condition. Marketing is mainly on its website and social media. However, TK’s Marketing Director believes that the monthly distribution of leaflets to businesses and households is a good use of the marketing budget. The average selling price of a meal is $8. The delivery charge is $5 per order and the average order is for 3 meals. Innovation Thierry has always ensured that TK is at the forefront of product and process innovations in the food delivery business. The majority of TK’s orders are received through its smartphone app. Thierry and the other TK directors are now interested in trialling automated (driverless) delivery vehicles (ADVs) in country H. The ADVs will be computer controlled and offer fast, low‑cost meal deliveries. ADVs may be ideal for deliveries in city locations. The capital cost of the ADV trial will be $1.5 million. This could be financed by further bank borrowing or a new share issue.

Operations and human resources TK’s kitchen operations are labour‑intensive. Meals are produced using batch production, but demand for different meals is difficult to predict due to changing food trends. This makes it very difficult to control inventory. Frequently, too much of some menu items is produced leading to food wastage. Recently, following a social media review praising a TK vegan curry meal, demand increased so quickly that the kitchens failed to produce enough. Some customers were disappointed because their orders were not met. TK’s Operations Director is investigating the use of lean production techniques, such as Just in Time (JIT), which he believes could improve efficiency. Each kitchen employs a manager and a team of ten full‑time chefs on permanent employment contracts. There are also kitchen assistants, meal packers and delivery drivers who are employed on a range of part‑time and zero‑hours contracts. Workers are under pressure to constantly improve productivity while maintaining high quality. As Thierry always reminds employees ‘the quality of our food is our USP, because we do not see customers face‑to‑face or serve them their meals’. Most TK employees are shareholders in the company. Annual productivity bonuses are paid in TK shares. Kitchen 2 – a problem kitchen Kitchen 2 is one of TK’s kitchens in country J. Kitchen 2 is not performing well because sales have declined over the past six months. The reasons for this are unclear. Kitchen 2 sells TK’s main menu items and has a maximum capacity of 2200 meals per day. The average daily output is 1000 meals but Saturday is the only day when all the meals produced are sold. Kitchen 2 is located in a low‑income area and the average order value is lower than for other kitchens. Thierry has asked for further financial information about Kitchen 2. Details of this are shown in Table 1. Table 1: Financial data for Kitchen 2 for the last 6 months $m Revenue 1.40 Cost of sales (ingredients and packaging) 0.38 Variable labour costs 0.80 Variable delivery costs 0.01 Rent and fixed utility costs 0.20 Head office costs including marketing 0.02

Table 2 shows extracts from TK’s financial data for 2021. Table 2: Extracts from TK’s financial data 2021 $m Revenue 25.40 Operating profit 3.98 Profit for the year 3.18 Total annual dividends 1.50 Non‑current liabilities 15.00 Capital employed 30.00 $ Share price at year end 14.00 Dividend per share 1.20 Further developments The directors of TK would like to diversify the activities of the business. They are considering two possible options for this. They will need to make a strategic choice as it will not be possible to carry out both projects. Option 1 Start a chain of luxury TK restaurants in the European cities where the kitchens are located. The restaurants would offer new menu choices including local speciality dishes. Option 2 Extend the TK product range to include packaged vegetable snacks. This would involve the takeover of a small manufacturer of premium snacks. A summary of the strategic choice data is shown in Appendix 1.

Appendix 1: Strategic choice data for options 1 and 2 Option 1 TK luxury restaurant chain Option 2 Takeover of snack manufacturer Initial cost $4m $2.5m Estimated accounting rate of return (ARR) 9.1% 7.6% Main driving force Market for luxury restaurants may grow as economies recover from recession Can be sold and delivered with existing meal delivery service Main restraining force Ability to respond to high level of competition in the market No experience in packaged snack production Estimated chances of failure 35% 30% Estimated monetary value over five years $3.5m $2.2m

Read the following extract before answering

Evaluate whether introducing Just in Time (JIT) will be sufficient to solve the inventory problems at TK.

‘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.