How should we make decision on purchasing raw materials quantity in the first period?
- What you do in the first period impact your potential demand immediately. The effect may be extended into the future periods too.
- Any procurement of raw materials at the first period will have to align with the potential demand that you anticipate for the second because it will be used to produce finished products to capture the potential demand in the second period.
- Note also that the price of raw materials can fluctuate from period to period and the inflation factor comes into play.
- If the market condition is such that price of raw materials is going to rise rapidly in the future periods, should you buy more now so you can save some money? But on the other hand, if you spend more money on raw materials now, do you still have money to pay for other expenses that are essential in creating potential demand?
- Buying a little more that the anticipated demand in the next period will impact your bottom line less than buying a little less, because not capitalizing the fullest of the potential demand does more harm to the bottom line than committing some more capital on raw materials which are still needed and will be used into the future. You need to find the equilibrium.
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