Inventory Management^251
It is, in fact, a common experience that the re-order level system gives slightly lower
average stock levels, and it is sometimes thought to be the cheaper system to operate
because reordering is triggered automatically at the re-order levels, however, requires
reviewing in the light of changes in the rate of demand. Any system can appear cheap
in the short run if it is operated in a slovenly manner.
Infrequent and Seasonal Demand
In most inventories it will be necessary to carry items which are slow moving in the
sense that units of demand are separated by significant intervals of time. These items
may have high individual value but because they are demanded infrequently they will
probably contribute only a small percentage of the total annual value of sales. The
normal distribution of stockholdings would show that about 20% of the line items carried
would contribute 80% of the total annual usage, though this relationship will vary between
different types of business.
It may be decided not to hold stocks of some slow-moving items, but to procure them as
and when they are required. If a stock is needed however the amount held will probably
be limited to the quantity most likely to be next demanded, the occurrence of the demand
being the signal for further procurement action. The quantity held may, however, be
increased if the purchase price per unit is sufficiently lower for large quantities so as to
offset any increase in holding costs for a larger stock holding. This could occur for
example when the supplier imposed a minimum order value.
There should be a regular review of slow-moving items to identify stocks which have
become technically obsolete or for which the demand has diminished to the point where
stock holding is no longer justified.
In some businesses (for example, ladies fashion wear), it is necessary to place orders
for the full seasonal requirement well in advance of the demand occurring, with a high
probability that repeat orders will not be obtainable. In such instances the purchase and
sale of each batch will be a separate project or venture dependent heavily on accurate
forecasting of demand quantities and selling prices. In this case, the evaluation procedure
applicable to stock holding for continuous demand will not apply.
Of a similar nature will be decisions like the following:
l to purchase goods in bulk in advance of demand arising in order to protect the
business against anticipated price rises or shortages of supply;
l to purchase commodities forward at a fixed price for future delivery;
l to combine forward purchase options with forward sales options, so as to
limit losses arising from price changes (including changes in currency exchange
rates);