Purchasing and Financing 2024

Deciding which system to choose will differ from case to case but the following general
principles can be used as a rough guide:
o Where the inventory carrying costs and average are relatively low so that only very
few replenishments would be necessary within a year, the cyclical system will be
the best option.
o When inventory consumption is subject to a seasonal demand pattern, the fixed
order quantity system will be the best option as you would be able to order more
regularly during the season of high demand and lower the risk that you might run
out of stock.
o In business with a large range of different products it might be more appropriate
to use the fixed order quantity system as keeping track of all the stock levels and
calculating how much of each product to order could become to labour intensive.
o When the rate of consumption tends to be rather constant, the cyclical system
might dominate the choice, as the risk of running out of stock can be minimised.
8. STOCK INDICATORS
Students can carry out a variety of calculations for stock indicators.
The following table indicates which stock indicator should be used for different
measurements and how they could be calculated.
Indicator Measure Formula
Order Quantity How much to order at a
Annual Use / Number of Orders
time
Average Stock General stock levels ( Order Quantity / 2 ) + Safety Stock
Turnover
Average Storage
Time
Average Storage
Cost
Average Capital
Tied Up
Storage Interest
Rate
How many times old stock
is replenished in a year
How long stock remains in
the warehouse on average
The cost involved in
keeping the stock on hand
Value of the stock on hand
Interest lost on stock on
hand
Annual Use / Average Stock
365 / Turnover
Average Stock x Storage Cost per Unit
Average Stock x Purchasing Price
(Average Storage Time x Interest Rate) / 365
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