2. DETERMINATION OF MATERIAL LEVELS
AND STOCK LEVELS:
Proper maintenance of stock items of each type of material is the main
function of stores department. Maintenance of large quantity of stock leads
to huge investment in materials, large space usage, dangers of deterioration
in the quality and obsolescence of materials .On the other hand, less stock
may result in frequent purchase ,higher costs, work stoppages, loss in
production, etc. Inorder to avoid overstocking and understocking od materials
in the storeroom, different levels of stocks are fixed. They are:
3. RE-ORDER LEVEL
It is that level of stock at which new purchase order is placed for fresh
supplies of the material. It is fixed somewhere between the maximum and
minimum levels to avoid unnecessary storage and shortage.
Re-order level=Maximum consumption × Maximum re-order period (or)
=Minimum level+(Average rate of consumption × Average time to
obtain fresh supplies)
NOTE: The choice of formula depends on the information available in a given
4. MAXIMUM LEVEL:
It represents that level of stock above which the stock should not be allowed
to rise. It is to be fixed keeping in mind unnecessary blocking of capital in
Maximum level=Re-order level+ Re-order quantity-(minimum consumption ×
minimum re-order period)
5. MINIMUM LEVEL:
It is that level below which the inventory of any item should not be allowed
to fall. It is also known as safety or Buffer stock. The main object of fixing
this level is to avoid unnecessary delay or hampering of production due to
storage of materials.
Minimum level = Re-order level-(Normal consumption × Normal re-order
6. AVERAGE LEVEL:
This level of stock may be determined by using the following formula:
Average level = Maximum level + Minimum level /2 (or)
= Minimum level + ½ re-order quantity
7. DANGER LEVEL:
This level is generally determined below the minimum level and represents
the level where immediate steps are taken for getting stock replenished .In
some cases, danger level of stock is fixed above the minimum level,but below
the re-ordering level.
Danger level = Average consumption × Lead time for emergency purchases
8. Economic Ordering Quantity can be calculated with the help of the following
A = Annual consumption or usage of materials in units
B = Buying cost per order
C = Cost per unit
S = Storage and carrying cost per Annum
Sometimes, consumption of materials may not be given in units but only in value.
In such a case, the formula for EOQ is slightly changed.
A = Annual consumption of materials in rupees
B = Buying cost per order
S = Storage and carrying cost percentage.