Krista and Damien own and manage Food and Fuel, a roadside café and service station located on a main highway on the way to the snow fields in the Victorian Alps. Food and Fuel services the tourist traffic each year and in addition, it supplies to the local community small car parts such as tyres, tubes, radiator hoses, fanbelts, spark plugs, bulbs, fuses and so on. As the cost of purchasing stock has risen inexorably year after year and stockholding costs have also risen, Krista has posed the question whether such large stocks are worth keeping. Damien argues that they have a reputation for 'nearly always having the part needed'. He says this is a reputation worth having. Krista counters that with the argument that they are often left with stock that they have especially ordered after customers 'forget' to return. Sometimes the orders are for special parts that are not generally in demand.
a. What are the investment issues here? Explain in terms of risk, opportunity costs and finance.
b. How do you suggest they could solve the 'forgotten' orders problem?