In the past, inventory was often seen as a great asset, because it provided prot

Question

In the past, inventory was often seen as a great asset, because it provided protection against uneven demand by maintaining "level" production. However, inventory can hide many problems. Today, inventory is seen as a liability, because it ties up capital resources that could be used elsewhere and it drives up costs by requiring additional handling, warehousing, and management resources. Identify a firm currently using a JIT system of materials management and describe the relationships between service level, uncertainty, safety stock, and order quantity in regards to inventory cost efficiency.

Explanation / Answer

Service level is the probability of not having a stock-out. In case of JIT system, the service level will tend to be lower than an organization which tends to hold inventory. This leads to lower cost efficiency.
Uncertainty in markets where demand is not easily predictable is high and leads to lower cost efficiency when JIT inventory system is followed by the organization.
Safety stock required under the JIT inventory is less and leads to higher inventory cost efficiency.
Order quantity is lower when JIT is used and leads to higher inventory cost efficiency.

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