The influence of purchasing constraints and uncertain demand on selected items of working capital of a leading South African cable manufacturer

Abstract

This research examines the impact of purchasing constraints and demand variability on working capital balances. The working capital accounts considered are creditors, debtors and raw material inventories. Purchasing constraints and demand uncertainty are defined.

The supply chain of the South African cable industry, and one manufacturer in particular, and the challenges faced in the cable manufacturing process are discussed.

To quantify the influences, a comparison between working capital accounts in the case of economic order quantity and actual purchasing practices is performed.

A simulation model is developed to reproduce a larger sample of demand data, matching the cumulative probability density function of each cable type contained in the annual sales budget.

The results show, that the working capital accounts react differently to changes in purchasing conditions and variations in demand, the most sensitive being raw material inventories. The study quantifies the influence of purchasing constraints on each working capital value.