Inventory Management^249
The supplier might, for example, impose a 'minimum order value' so that for quantities
below this limit the cost per unit would, in effect, be higher than normal. This would
either impose a lower cut-off limit on the size of order placed, or would introduce an
upward curve at the lower end of the holding cost line on the EOQ chart, since insurance
and interest charges per unit would be relatively high until the small order limit was
reached. For larger orders, on the contrary, there might be quantity discounts, and these
would cause one or more downward steps at those points on the holding cost line
where they began to operate.
This possibility can result in minimum total cost which differs from the position of the
EOQ as originally calculated. This point is sometimes distinguished as the 'optimum
order quantity'.
Safety Margins in Stockholding
So far we have assumed that a company will he placing purchase orders at
regular intervals of time for a fixed quantity (the economic or optimal order quantity)
of any particular item. The possibility of doing this depends on demand remaining
constant from period to period and on supplies being available as and when
required.
Sales demand, however, could show fluctuations around the normal level, so that in a
period of high demand the available stock could be used up before fresh supplies are
due. Similarly, in some periods deliveries from suppliers could be delayed so that even
the normal sales demand could not be satisfied.
Against both these contingencies, it is necessary to hold a safety margin of stock. If it
were necessary to hold a safety margin sufficiently large to cover the simultaneous
occurrence of a peak in demand and a delay in supplies, then the minimum stockholding
would form the greater part of the total stockholding.
Very little can be done to correct for random delays in supply, but it may be possible to
anticipate changes in the trend of demand and to modify the purchasing procedure to
meet them in one of the following ways:
l to order in economic order quantities but at varying time intervals according to the
rate of demand currently being experienced, or anticipated in the near future - this
is known as the fixed order quantity or re-order level system (for reasons which
will be explained below);
l to order at regular intervals but in varying quantities determined by the current
rate of demand - this is the fixed interval, or periodic review system.