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Inventory Levels [Reorder, Max, Min Levels]

inventory levels

The following levels of inventory are fixed for efficient management of inventory.

Reorder Level

Reorder level is the level of stock availability when a new order should be placed. This is the point fixed between the maximum and minimum stock levels and at this time it is essential to initiate purchase actions for fresh supplies of the material. 

The following factors are taken into account while fixing the reorder level:

  • Maximum usage of materials
  • Maximum lead time
  • Maximum stock level
  • Minimum stock level

Reorder Level = Maximum usage X Maximum lead time

The length of time between the placement of an order on a supplier and its receipt is called a lead time.

Minimum Stock level

Minimum stock level is the lower limit below which the stock of any stock item should not normally be allowed to fall. This level is also called Safety Stock or Buffer Stock Level.

Safety stock is inventory held at all times regardless of inventory ordered using EOQ. Like a capacity cushion, safety stock is a buffer against unexpected increases in demand or lead time and unavailability of stock from suppliers.

The main object of establishing this level is to protect against stock-out of a particular stock item and in fixation of which average rate of consumption and the time required for replenishment i.e., lead time are given prime consideration.

The following factors are taken into account while fixing the minimum inventory level:

  • Average rate of consumption of material
  • Average lead time. The shorter the lead time, the lower is the minimum level.
  • Reorder level
  • Nature of item
  • Stock-out cost

Minimum stock level = Re-order level – (Average or Normal usage X Average lead time)

Maximum Stock level

Maximum stock level represents the upper limit beyond which the quantity of any item is not normally allowed to rise to ensure that unnecessary working capital is not blocked in stock-items.

The maximum stock level will be fixed sum. It represents the total of safety stock level and economic order quantity.

The following factors are taken into account while fixing the maximum inventory level:

  • Average rate of consumption of material
  • Lead time
  • Reorder level
  • Maximum requirement of materials for production at any time.
  • keeping qualities i.e. risk of deterioration, obsolescence, evaporation, depletion and natural waste, etc.
  • Economic order quantity is also considered.

Maximum stock level can be expressed in the formula given below:

Maximum level = Re-order level + Re-ordering quantity – (Minimum usage X Minimum lead time)

Danger level

Danger level of stock is fixed below the minimum stock level and if stock reaches below this level, urgent action for the replenishment of stock should be taken to prevent stock-out position.

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