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(^252) Financial Management
l to purchase foreign currency forward against specific overseas purchases, so as
to minimise the effect of changes in exchange rates.
These are financial decisions quite separate from the routine problems of inventory
control, and would be evaluated as investment projects.
The Total Inventory
The techniques described in the foregoing paragraphs all relate to single line items of
stock; the assumption has been made that if each item is held at its own economic level
then the overall holding of stock will be correctly balanced. This would be true provided
that two conditions were satisfied.
l that there was enough space available to hold all the stocks required; and
l that enough money could be found to finance them.
Neither condition is likely to be fulfilled in practice, so some form of mathematical
programme might be used to constrain the ideal unit quantities within the limiting factors.
There are, however, a number of simple pragmatic approaches to inventory reduction,
and these include:
l modifying the service level offered, either generally or in relation to selected items;
l letting the company's suppliers act as stockholders (possibly by placing bulk orders
with schedules of call-off dates linked to sales demand);
l discontinuing those items which are the least profitable having regard to their
marginal contribution and relevant fixed costs per unit of the limiting factor.
Raw Material Stocks and Work-In-Progress
So far, in considering inventory control we have been discussing saleable stocks, but
the same principles apply to stocks of raw materials. The main difference is that demand
for raw materials is not direct from the outside customers but indirect through the
production plans of the factory using the raw materials.
In considering the scheduling of production the 'Economic Batch Quantity' (EBQ)
corresponds to the EOQ for purchased items. Manufacture in small batches will be
more costly than in larger batches because there will be greater repetition of planning
and progress actions and of the setting up and breaking-down of machine tooling, and
also because there will be less opportunity for an efficient momentum of work to be
established. However, these batch processing costs (like procurement costs of stocks)
will change inversely to the holding costs of the work-in-progress (floor space, insurance,
interest on capital, etc.).