ACCA FM Syllabus C. Working Capital Management - Buffer Stock - Notes ^{3 / 4}

Let’s say we sell 10 items of stock a week, and stock takes 2 weeks to come in.

Hopefully you can see that we need to make an order when stock levels fall to 20

If we order when they fall to 30, this must mean we like to keep a buffer (safety) stock of 10

Re-order Level

Demand x Lead Time

• So, EOQ looks at how much to order, now lets look at when.

  The answer should be obvious - it is when you run out of stock. 

  However you need to reorder before that, to give the stock time to arrive.

  So the RE-ORDER level is not zero it is DEMAND x Time it takes to arrive in stock.

  This though presumes constant and known demand. Luckily that is all that is needed in this examination!

Buffer Stock

Can be calculated if not given:

• Actual re-order level - Stock used in lead time

Using EOQ with Buffer Stock

1. Calculate Buffer stock (if not given)

2. Calculate EOQ and costs ignoring buffer stock

3. Add on HOLDING costs for buffer stock