| Summary: | A study is made of the inventory control procedures in a manufacturing company with an annual turnover of around £5M. The study is made at a time of fluctuating prices and varying interest rates in order to determine both their effect on, and ways of improving, the control procedures. The study concentrates on one of the many stock items carried, peppermint oil, it being fairly typical. The study lists the main costs of establishing and growing peppermint in Washington State. The study reveals the importance of price forecasting in the determination of timing and quantity of purchases. Various price forecasting methods including that due to Box and Jenkins are tested and found wanting for one reason or another. The ordinary economic order quantity formula is modified to take account of fluctuating prices and varying interest rates. It is then tested with an assumption of perfect price forecasts against the performance of the firm’s buyer over the years 1971-1978. The results indicate that the buyer possesses faculties which cannot yet, if ever, be emulated by machine based formulas. Normally economic models are devised with the assumption that the purchaser is at least risk-neutral if not risk-averse. This study reveals a pronounced bias in the opposite direction, namely risk-preference, in the case of essential oil traders. The study, in examining the market structure, also shows that there are peppermint farmers in the western United States who are both willing and able to make direct contracts with importers in the United Kingdom in order to eliminate the risks associated with dealing through second and third parties. The absence of a formal controlled market for the particular oil studied is noted together with the buyer’s inability uO ’hedge’ except with purchases of other equally risky oils. It is recommended that the possibility of such a market being organised be further investigated.
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