Directorate of distance education

Order Processing
2 Inventory
Inventory, or stock management, is a critical area of PDM 
because stock levels have a direct effect on levels of service and customer 
satisfaction. The optimum stock level is a function of the type of market in 
which the company operates. Few companies can say that they never run 
out of stock, but if stock-outs happen regularly then market share will be 
lost to more efficient competitors. 

---

Notes
17
The key lies in ascertaining the re-order point. Carrying stock 
at levels below the re-order point might ultimately mean a stock-out, 
whereas too high stock levels are unnecessary and expensive to maintain. 
The stock/cost dilemma is clearly illustrated by the systems approach to 
PDM that is dealt with later.
Stocks represent 
opportunity costs
that occur because of constant 
competition for the company’s limited resources. If the company’s 
marketing strategy requires that high stock levels be maintained, this 
should be justified by a profit contribution that will exceed the extra 
stock carrying costs. Sometimes a company may be obliged to support 
high stock levels because the lead-times prevalent in a given market are 
particularly short. In such a case, the company must seek to reduce costs 
in other areas of the PDM ‘mix’.
Inventory control can be a major component of a small business 
physical distribution system. Costs include funds invested in inventory, 
depreciation, and possible obsolescence of the goods. Experts agree 
that small business inventory costs have dropped dramatically due to 
deregulation of the transportation industry.
 Inventory Management System

---

Notes
18
Inventory control analysts have developed a number of techniques 
which can help small businesses control inventory effectively. The most 
basic is the Economic Order Quantity (EOQ) model. This involves a trade-
off between the two fundamental components of an inventory control 
cost: inventory-carrying cost (which increases with the addition of more 
inventory), and order-processing cost (which decreases as the quantity 
ordered increases). 
These two cost items are traded off in determining the optimal 
warehouse inventory quantity to maintain for each product. The EOQ 
point is the one at which total cost is minimized. By maintaining product 
inventories as close to the EOQ point as possible, small business owners 
can minimize their inventory costs.