Horti-Business Management (2+0)

3. Determining when to order

• The level of inventory at which an order should be issued is based on :
1. The quantity to be used between times an order is issued and items are received.
2. A quantity needed to provide a margin of safety.

• The time to be allowed in (1) is determined by the time taken for
a) Order to be processed by the firm
b) Order to be transported to the vendor
c) Vendor to make and pack the items
d) Items to be transported to the firm

• Estimates of cost of carrying inventory ranges from 15% to over 100% of the average inventory investment for a year. Values of 20% to 25% are often used. The recording point quantity can be estimated by computing various levels and reordering points and adding the cost of carrying the inventory and cost of running out of goods multiplied by the probability of running out. The lowest cost is the best order point.