Chapter 13 • Management of working capital
purchase price of the inventories themselves as this is defined by the annual usage and
the price per unit and is independent, except for the question of possible discounts for
bulk orders, of the size of each order and the average inventories level.)
Figure 13.5 shows the behaviour of the costs with various levels of inventories. As
inventories levels and, following our assumptions depicted in the graph in Figure 13.4,Figure 13.4
Graph of the
inventories level
against time for
an inventories item
An amount (E) of inventories is delivered at time 0. This is steadily used until the level drops to
0, at which point a new consignment (amount E) arrives. The average level of inventories is E/2.Figure 13.5
Graph of the
inventories holding
costs and order
costs against the
average level for
some item of
inventories
The larger the inventories order, the larger the amount of the average inventories level and
the higher the holding costs. On the other hand, large orders mean relatively infrequent
orders and, therefore, relatively low total order costs. There seems likely to be an optimum
inventories order size, which will balance the two types of cost.