Multi-Item Working Capital Prioritizer

How this works

A limited safety-stock budget spread across several items by absolute stockout-cost size, rather than by return per dollar of capital, systematically underfunds the items that would have paid back the most. This engine ranks each item by stockout cost avoided per dollar of capital required, then allocates the budget greedily in that order, funding each item fully until the budget runs out and funding the item at the margin proportionally.

Key terms

• Ratio: stockout cost avoided per dollar of working capital required for an item, the ranking metric, not the absolute dollar figure.
• Funded fraction: how much of an item's full capital requirement the remaining budget actually covers, fully funded, partially funded at the margin, or unfunded.
• Residual risk: the annual stockout cost still left unaddressed once the budget runs out.

Assumptions

• Partial funding of an item's proposed safety stock proportionally reduces its stockout cost avoided, a linear approximation
• Two or three items only, not an open-ended portfolio

Limitations

• Does not model correlation in stockout risk across items
• A single allocation pass, not a continuous multi-period replenishment optimizer

Sources

Standard capital-rationing benefit-cost-ratio ranking treatment (Brealey, Myers, and Allen, Principles of Corporate Finance, capital rationing chapter), the same shadow-price-per- constrained-resource logic used in Contribution Margin per Constraint Hour, with working capital as the constraint instead of a bottleneck hour.

Worked example

With a $6,000 budget, Item 1 needs $8,000 to fully cover its risk and would avoid $4,000/year in stockout cost, a 0.5x ratio. Item 2 needs only $2,000 and would avoid $3,000/year, a 1.5x ratio. Ranking by ratio funds Item 2 fully, then puts the remaining $4,000 into Item 1 (50% funded), realizing $5,000/year avoided. Ranking by absolute dollar size instead would fund Item 1 first (its larger $4,000 figure looks more attractive), partially covering it with the full $6,000 budget and leaving Item 2 completely unfunded, realizing only $3,000/year, $2,000/year worse for the exact same budget.

Common use cases

• Allocating a fixed safety-stock budget across two or three competing items
• Checking whether a proposed allocation is actually the highest-return use of the available capital
• Making the case for funding a smaller-looking item that carries a better return per dollar
• Continuing from Stockout Cost Decision's per-item figures into a portfolio-level allocation