Purchasing and Financing 2024

Sipho runs a bottle store in Mamelodi. He sells 25 to 30 cases of beer daily. He orders
from the SAB depot in Johannesburg, which is 75 km away. It takes 3 days to deliver the
beer. Occasionally Johannesburg cannot deliver, and then Vereeniging (300 km away)
supplies, but that will take 2 days longer.
You are expected to establish the re-order level and make a recommendation regarding
safety stock.
General Rule: The safety stock should cover the time it takes to deliver if the normal
delivery does not arrive.
Step 1: Establish the safety stock.
Safety Stock = Maximum daily consumption x Maximum delay
= 30 x 2
= 60 cases
Step 2: Establish the re-order level.
Order Level = Safety Stock + (Average Inventory Consumption x Lead time)
= 60 + (27.5 x 3)
= 143 cases
Fluctuating Inventory Consumption
Students can argue the merits of fixed ordering quantity systems and cyclical ordering
systems.
In the case of a constant inventory consumption rate, we ordered the optimal quantity at
the re-order level. When the delivery came in, we were sure that (due to the predictable
depletion) the inventory would be replenished up to the planned capacity.
If there is no such constant inventory consumption, we do not know how many units will
be sold during the lead-time of the delivery. Hence, it may be that we already made use of
our safety stock (increasing consumption) or we still have plenty of stock when the
delivery comes in.
The problem arises to determine the actual quantity ordered under these conditions.
There are two approaches that are applied by companies:
• Fixed Order Quantities System
• Cyclical Ordering System
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