Working capital planning – Raw material inventory norm: In estimating working capital, a typical allowance for raw materials inventory is approximately how many months’ supply (valued at delivery prices) for a chemical plant?

Introduction / Context:
Working capital sizing is crucial to avoid stockouts and production interruptions in process plants. Rules of thumb guide raw material inventory levels when detailed logistics data are unavailable.

Given Data / Assumptions:

• Continuous process operations with regular deliveries.
• Reasonable supply chain reliability.
• Raw materials valued at delivery prices for inventory purposes.

Concept / Approach:
Classic chemical engineering economics texts suggest that raw material inventories are often planned around one month of consumption under normal conditions. This balances carrying cost against supply risk, assuming stable procurement and transportation.

Step-by-Step Solution:
Identify typical norms: RM inventory ≈ 1 month.Recognize exceptions: remote sites or volatile supply chains may require more.Choose the standard baseline answer used in quick estimates: one month.

Verification / Alternative check:
Comparative industry practices often allocate about a month for RM, smaller for WIP, and modest finished goods inventory, adjusting by product shelf-life and demand variability.

Why Other Options Are Wrong:

• Three to twelve months tie up excessive capital and storage, suitable only for very risky or seasonal procurement scenarios.
• Six or twelve months are atypical for standard continuous plants due to high carrying costs.

Common Pitfalls:
Ignoring lead-time variability and minimum order quantities; these may force deviations from the 1-month rule.

Final Answer:
One month