Page 191 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Working Capital Management

Notes
Example: Determine reorder level, minimum level, maximum level, and average stock
level.
Normal usage – 100 units per week; Lead-time – 4 to 6 weeks
Minimum usage – 50 units per week; Maximum usage – 150 per week
Reorder quantity – 600 units

Solution: Reorder Level = Maximum usage × Maximum delivery time
= 150 units × 6 weeks = 900 units
Minimum Level = Reorder level – (Normal Usage × Average delivery time)
= 900 units – (100 units × 5 weeks) = 400 units
Maximum Level = Reorder level + Reorder quantity –
(Minimum usage × Minimum delivery time)
= 900 units + 600 units – (50 units x 4 weeks) = 1,300 units
Average Stock Level = Minimum level + (Reorder quantity ÷ 2)

= 400 units + (600 units ÷ 2)
= 700 units.
6. Periodic Order System: Under the periodic order system, the stock levels for all inventory
accounts are reviewed at established intervals, and orders are placed to bring all accounts
up to their maximum levels. The length of review period often varies for different accounts
and for different classes of items, thereby permitting higher or lower turnover rates as
required. Since, orders are automatically placed, at the end of the review periods, the
system greatly simplifies the ordering process. The advantage may, however, sometimes
be a disadvantage because of the heavy paperwork burden it places periodically on the
purchasing department.

Case Study Nordstrom’s Perpetual Inventory System

ordstrom had its origins in a small shoe store ‘Wallin & Nordstrom’ (US) that
began operations in 1901 in Seattle (US). The store was set up by Sweden’s John
NW. Nordstrom and his friend Carl Wallin from Alaska. The duo had met in the
late 1890s while trying to strike it rich in the Alaskan gold rush. Later on, they decided to
enter into a partnership to put to use the money they made in Alaska. Since Carl Wallin
was experienced in the business of shoes (he owned a shoe repair shop), they decided to
open a shoe store.
Due to the duo’s focus on offering quality, value-for-money merchandise and superior
customer service, business flourished despite stiff competition from other local players. As
the money poured in, the partners kept moving the store to bigger and better locations. The
second Wallin & Nordstrom store was opened in 1923. In 1928, John W. Nordstrom handed
over his stake in the business to his sons Elmer and Everett. The following year, Carl Wallin
too sold his stake in the business to them. In 1933, John W. Nordstrom’s third son, Lloyd,
joined Elmer and Everett. The second generation Nordstrom’s decided to expand the selection
of shoes sold in a major way by adding many new styles, sizes, colors and brands.
Contd...

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