Inventory Management^245
l Purchase order processing costs per unit or Rs. value of purchases ( and possibly
even in total as shown) are likely to diminish as stock holdings are increased,
because instead of having to frequent orders for the renewal of stocks, the company
is now placing less frequent bulk orders i.e. one negotiation, one order and one
progress action cover a large quantity of any particular item;
l Stock holding costs naturally increase with the size of stockholdings because:
- stocks occupy space which has to be purchased, rented or converted from some
other use - that space has to be equipped with racks or containers; - people are required to put the stocks into the warehouse, to withdraw them when
needed (picking and packing), to record them, check their conditions and ensure
they are not lost; - stocks lose value if they deteriorate, are wasted in handling, pilfered, destroyed or
allowed to become obsolete - it may be desirable to insure against some of these
risks; - stocks tie up money, involving interest charges or opportunity costs.
Why should increased stocks give rise to increased sales? One reason would be
that the business may offer a wider range of goods and it diversifies its range.
Another could be that with the existing range the business was offering a better
level of service; i.e. it was less frequently out of stock of an item when it was
required.
Stock Service Levels
In deciding on an inventory policy it is necessary to define the level of service to be
offered to the customer, in the sense of the percentage of order which can be satisfied
immediately from stock. This will depend on the nature of the business.
In some cases the company may be the monopoly supplier of certain goods, or may
offer particular advantages of quality, reputation., reliability or after-sales services.
Where such distinguishing features exist, it is possible that the customers will be prepared
to endure occasional delays in meeting their requirements, and it would not be necessary
to hold sufficient stocks to ensure immediate delivery.
In other cases quick delivery may be an essential feature of success in achieving sales.
This would be the case, for example, if there was strong competition for a limited
market, or if the failure to supply a spare part for installed equipment would cause
significant loss to the customer while the equipment was out of use.
When the required level of service has been defined, the next problem is to decide how
much stock is needed to meet that requirement. This will be the minimum holding, and