Evaluate just-in-time inventory decisions
Explain JIT principles and evaluate the savings, service and supply-continuity trade-offs for materials management.
Section 2.1 · Costs and cost behaviour
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These original lessons cover Topic 2.1.1: materials and labour costs, fixed, variable, semi-variable and stepped costs, direct and indirect cost elements, FIFO and AVCO under periodic and perpetual inventory systems, and just-in-time principles. Practice is self-checked, not an official Cambridge grade; full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use arithmetic with units and distinguish a material purchase, material issued to production, labour cost and inventory balance before classifying a production cost.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
What is the main inventory aim of JIT?
What you will learn
- Explain how JIT coordinates material supply with production need
- Evaluate JIT benefits and risks in a stated business context
- Recommend evidence and safeguards for an inventory decision
Coordinate materials to arrive when needed
Just-in-time (JIT) aims to arrange for materials to arrive close to when they are needed for production, keeping inventory relatively low. It is a way of coordinating purchasing, suppliers and operations; it does not mean that every business must hold zero inventory.
Less stock can reduce storage, insurance, handling, deterioration and cash tied up in inventory. Smaller, more frequent deliveries can expose quality problems sooner and reduce excess or obsolete materials, if the supply system works reliably.
Balance holding costs against interruption risk
Low buffers make production more exposed to late deliveries, transport disruption, supplier failure, inconsistent quality or a sudden rise in demand. Frequent small orders may also cost more to arrange, and a stockout can stop production or lose sales so that the disruption outweighs stock savings.
JIT is more suitable when suppliers are dependable, lead times are predictable, quality is consistent, schedules and information are shared and production can respond quickly. Evaluate the total relevant cost and service effect; use targeted buffer stock for critical or uncertain materials where evidence supports it.
Pause and explain
What is one risk when a business reduces buffer stock?
Worked example
A bicycle assembler proposes JIT for imported brake parts because storage costs are rising. A port delay recently stopped production for three days. Assess the proposal and identify evidence for a recommendation.
Show the worked solution
- JIT may reduce average stock, storage and cash tied up in brake parts.
- The recent delay shows that a low buffer could stop assembly again; the cost of lost output may exceed the storage saving.
- Compare supplier and transport reliability, lead-time variation, stockout cost, storage cost and the availability of a tested alternative source; a targeted safety buffer may be appropriate.
Answer Do not move all brake parts to zero stock on the current evidence. Compare total holding costs with the likely disruption cost, check delivery variability and alternatives, and test reduced stock for reliable parts while retaining a justified buffer for critical supplies.
Try a topic test
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Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A food producer holds four weeks of packaging. A supplier offers daily delivery but has variable lead times. Give one possible JIT benefit, two risks and one practical safeguard.
Give me a hint
Connect stock reduction to storage and cash, then consider perishability and delivery variation.
Compare my reasoning
- Lower packaging stock may reduce storage and cash tied up; it may also reduce obsolescence after a package redesign.
- Variable lead times can interrupt packing; frequent orders may increase delivery cost or fail during a disruption.
- Track delivery performance and quality, agree service measures and retain a targeted buffer based on lead-time variation.
JIT could reduce storage and obsolete packaging. Variable delivery times threaten production, so assess total delivery cost and maintain a targeted buffer until supplier reliability is evidenced.
Look for these in your work
- Benefit tied to inventory
- Both operational and cost risks named
- Evidence-based safeguard proposed
A supplier offers a 6% discount for monthly bulk orders, while the current weekly order policy costs more to administer. Compare the options for a material that becomes obsolete when a product design changes.
Give me a hint
Compare purchase price and ordering cost with holding, obsolescence and continuity risks.
Compare my reasoning
- Monthly orders may earn a purchase discount and reduce order-processing frequency.
- They increase average stock and cash tied up, and more material could become obsolete after a design change.
- Weekly replenishment may reduce obsolescence exposure but costs more to administer and depends on reliable supply.
Compare total expected cost rather than the discount alone. Monthly orders may save purchase and administration costs, but higher stock increases obsolescence exposure. Use demand, design-change timing, supplier lead times and holding-cost data to choose an order pattern or smaller staged deliveries.
Look for these in your work
- Discount quantified as a factor
- Obsolescence and holding considered
- Decision tied to evidence
A manager wants to adopt JIT for every material to improve a working-capital ratio. Recommend how to evaluate the proposal without treating the ratio as the only objective.
Give me a hint
Lower inventory can change the ratio, but production continuity and customer service are also business outcomes.
Compare my reasoning
- Segment materials by importance, demand variation, shelf life, supplier reliability and lead time.
- Estimate storage and cash savings alongside lost output, expediting, quality and stockout costs.
- Pilot reliable, predictable materials first; monitor inventory, delivery performance, stoppages, quality and customer service, then revise buffers.
Do not use the ratio alone to justify JIT for every material. Test the approach for predictable supplies, retain targeted buffers for critical or uncertain items and monitor total cost, delivery reliability, production stoppages and service before expanding it.
Look for these in your work
- Material differences considered
- Financial and operational trade-offs compared
- Pilot and monitoring proposed
Common mistakes
- Defining JIT as holding no inventory in every circumstance
- Counting storage savings but ignoring stoppage and lost-sales costs
- Assuming a supplier's quoted lead time is always achieved
What can you explain now?
Name one condition that supports successful JIT purchasing.
Compare with the explanation
Reliable suppliers with predictable delivery and consistent quality
JIT depends on material arriving when production needs it.
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Make it stick
Name two conditions that help JIT work and one cost of reducing stock too far.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.