Stock Level | Reorder Level | Minimum Stock Level | Maximum Stock Level
Arjun EP
Stock Level
The basic meaning of inventory is unsold goods, unused raw materials or semi processed raw materials (work in progress).
To ensure regular production or regular sales, inventory is essential component.
The term inventory represents the stock of consumable items like raw material, work in progress, finished goods, supplied etc held by the firm; waiting either for sale or production or its utilization to achieve their respective goals.
Such as inventory purchasing economically, using appropriately and preserving carefully are the main objectives of inventory management.
In other words, optimum investment in inventory is the inventory management.
To avoid over and under stocking, the stock keeper or inventory management must fix the inventory level. Inventory level also known as demand and supply methods of stocking.
For the inventory control, the following levels of material are fixed:
Re-order level
Minimum stock level (safety level)
Maximum stock level
Average stock level
Danger level
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Final Accounts: Class 12 |
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Reorder Quantity
Reorder quantity is also known as economic quantity in inventory management.
Reorder quantity is the required units of materials that should be included in new order.
By maintaining reorder quantity, production will not disturb.
Reorder quantity or economic quantity minimises the ordering cost and carrying cost.
Reorder Level
Reorder level is also known as reorder point.
Reorder level is the material stock level; from this level, the inventory management should initiate (begin) purchase requisition for fresh supply.
Whenever the inventory comes down to reorder level, it is an indication that an action should be taken for the purchase of material.
ROL depends upon the lead time, rate of consumption and economic order quantity.
The formula of reorder level
Reorder level (ROL)
= Maximum consumption x Maximum re-order period
= Minimum stock level + Lead time consumption
= Safety stock + (Lead time x Daily consumption)
= Normal lead time x Daily consumption
Where: Procurement = lead time
Keep in Mind (KIM)
Some important synonyms or abbreviations used in stock level |
|
|
ROP |
= re-order period |
|
ROL |
= re-order level |
|
Re-order period |
= lead time or procurement time |
|
Minimum stock |
= safety stock |
|
Uses |
= consumption |
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Inventory |
= stock |
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Average |
= normal or nominal |
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Minimum level |
= minimum stock level |
|
Maximum level |
= maximum stock level |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1A
The following information is extracted from ABC Manufacturing Company:
|
Annual requirement of raw materials |
6,120 tons |
|
Days in a year |
360 days |
|
Safety stock |
30 days consumption |
|
Normal lead time |
12 days |
Required: (1) Safety stock; (2) Reorder level
[Answer: SS = 510 units; ROL = 714 units]
Solution:
Given and working note:
Daily consumption = 6,120 tons ÷ 360 days = 17 units
Safety stock
= 30 day’s consumption
= 30 days x 17 units
= 510 units
Explain: safety stock is buffer or safeguard. Under safety stock, organization goes to danger level.
Re-order level
= Safety stock + (Lead time x Daily consumption)
= 510 + (12 x 17)
= 510 + 204
= 714 units
Explain: reorder level is the level to reorder or purchase fresh supplies or goods.
Keep in Mind (KIM)
|
Lead-time is difference of ordering time and receiving time of good. |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1B
ABC Manufacturing Company has following information:
|
Re-order period |
6 – 8 days |
|
Consumption |
300 – 400 kg |
Required: Reorder level
[Answer: ROL = 3,200 kg]
Solution:
Given and working note:
Maximum ROP = 8 days
Maximum consumption = 400 kg
Re-order level
= Maximum consumption x Maximum ROP
= 400 kg x 8 days
= 3,200 kg
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1C
Apex Chemical Company has following information:
|
Annual requirement |
= 188,800 kg |
|
Lead time |
= 4–8 days |
|
Days in year |
= 360 days |
Required: Reorder level
[Answer: ROL = 2,160 kg]
Solution:
Given and working note:
Daily require = 188,800 kg ÷ 360 days = 360 kg
Normal lead time = (4+8) ÷ 2 = 6 days
Now,
Re-order level
= Normal lead time x Daily consumption
= 6 days x 360 kg
= 2,160 kg
Minimum stock level (MSLMIN)
Minimum stock level is also known safety stock or stock of buffer.
MSLMIN represents the minimum quantity of materials, which must be maintained at all the time.
In normal working condition, the stock of materials should not be fall below the minimum stock level.
This helps to stop production.
It can be used only under abnormal or emergency condition.
The formula of minimum stock level
Minimum stock level
= Reorder level − (Average consumption x Average Reorder period)
= ROL – (Average consumption x Average ROP)
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1D
A unit of Jagadamba Steel Industry has provided following information:
|
Re-order period |
8 – 10 days |
|
Daily consumption |
4,000 – 6,000 tons |
Required: (1) Re-order level; (2) Minimum stock level
[Answer: ROL = 60,000 tons; MSL = 15,000 tons]
Solution:
Given and working note:
Maximum ROP = 10 days
Maximum consumption = 6,000 tons
Average ROP = (8 + 10) ÷ 2 = 9 days
Average consumption = (4,000 + 6,000) ÷ 2 = 5,000 tons
Re-order level (ROL)
= Maximum consumption x Maximum ROP
= 6,000 tons x 10 days
= 60,000 tons
Minimum stock level (MSLMIN)
= ROL – (Average consumption x Average ROP)
= 60,000 – (5,000 tons x 9 days)
= 60,000 – 45,000
= 15,000 tons
Explain:
Minimum stock level is equal to safety stock. Under this level, organization goes to a danger level
Keep in Mind (KIM)
|
The formula of minimum and maximum stock level is given by Harold J. Wheldon |
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ROQ = EOQ in this chapter. |
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If daily consumption is given in question, minimum = maximum = average |
Maximum stock level (MSLMAX)
Maximum stock level represents the maximum quantity of materials, which can be held in stock at any time.
Stock should not be exceeding from this level.
Beyond this level, capital will be blocked on stock.
If manufacturing company keeps more stock than maximum stock level, carrying and holding cost increases.
The formula of maximum stock level
Maximum stock level
= Re-order level + Re-order quantity – (Minimum consumption x Minimum ROP)
= ROL + ROQ − (Minimum consumption x Minimum ROP)
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1E
XYZ Rice Mill has following information:
|
Consumption per day |
2,500 – 3,000 tons |
|
Lead time |
4 – 8 days |
|
Re-order quantity |
25,000 tons |
Required: (1) Re-order level; (2) Maximum stock level
[Answer: ROL = 24,000 tons; MSL = 35,000 tons]
SOLUTION:
Given and working note:
|
Minimum consumption |
= 2,500 tons |
|
Maximum consumption |
= 3,000 tons |
|
Minimum ROP |
= 4 days |
|
Maximum ROP |
= 8 days |
|
ROQ |
= 25,000 tons |
Re-order level (ROL)
= Maximum consumption x Maximum ROP
= 3,000 tons x 8 days
= 24,000 tons
Maximum stock level (MSLMAX)
= ROL + ROQ – (Minimum consumption x Minimum ROP)
= 24,000 + 25,000 – (2,500 tons x 4 days)
= 45,000 – 10,000
= 35,000 tons
Explain:
Organization should not be kept stock more than maximum stock level. Because, it blocks unnecessary capital on stock.
Average Stock Level
Average stock level (ASL) shows the average stock of materials held by manufacturing company.
It is maintained on the basis of average consumption.
The formula of average stock level
Average stock level
= Minimum stock level + (ROQ ÷ 2)
= Minimum stock level + (EOQ ÷ 2)
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1F
Extracted information is taken from Pokhara Grill Industries:
Minimum stock level 2,000 units
Economic order quantity 5,000 units
Required: Average stock level
[Answer: ASL = 4,500 units]
SOLUTION:
Average stock level (ASL)
= Minimum stock level + (EOQ ÷ 2)
= 2,000 + (5,000 ÷ 2)
= 2,000 + 2,500
= 4,500 units
Explain:
Average stock level is the average of minimum stock level and maximum stock level.
Danger Level
Danger level means below the minimum stock level.
When the stock reaches this level, the inventory management must make special arrangement to purchase fresh or new materials, so that the production may not be interrupted due to the shortage of materials.
The formula of danger level
Danger level
= Average consumption x Maximum ROP
= Normal consumption x Maximum emergency period
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1G
Following information is given:
|
Normal consumption |
1,500 units |
|
Normal lead time |
10 days |
|
Maximum emergency period |
4 days |
Required: Danger level
[Answer: DL = 6,000 units]
SOLUTION:
Danger Level (DL)
= Normal consumption x Maximum emergency period
= 1,500 units x 4 days
= 6,000 units
Explain: danger level is below safety stock or minimum stock level. This level can stop production.
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1H
Buddha Power Inverter Company has following information:
|
Minimum consumption |
6,000 units per week |
|
Average consumption |
9,000 units per week |
|
Re-order period |
2 – 4 week |
|
Economic order quantity |
7,000 units |
Required: (a) Re-order level; (b) Maximum consumption; (c) Minimum stock level; (d) Maximum stock level;
(e) Average stock level; (f) Danger level
[Answer: ROL = 48,000 units; MC = 12,000 units; Min SL = 21,000 units;
Max SL = 43,000 units; ASL = 24,500 units; DL = 36,000]
SOLUTION
Given and working note:
Average ROP = (minimum + maximum) ÷ 2 = (2+4) ÷ 2 = 3 week
Re-order level (ROL)
= Maximum consumption x Maximum ROP
= 12,000 units x 4 weeks
= 48,000 units
Maximum consumption
|
Average consumption |
= |
(Minimum consumption + Maximum consumption) ÷ 2 |
|
9,000 |
= |
(6,000 + Maximum consumption) ÷ 2 |
|
9,000 x 2 |
= |
6,000 + Maximum consumption |
|
18,000 – 6,000 |
= |
Maximum consumption |
|
Maximum consumption |
= |
12,000 units |
Minimum stock level (MSLMIN)
= ROL – (Average consumption x Average ROP)
= 48,000 – (9,000 units x 3 weeks)
= 48,000 – 27,000
= 21,000 units
Maximum stock level (MSLMAX)
= ROL + ROQ – (Minimum consumption x Minimum ROP)
= 48,000 + 7,000 – (6,000 units x 2 weeks)
= 55,000 – 12,000
= 43,000 units
Average stock level (ASL)
= Minimum Stock Level + (EOQ ÷ 2)
= 21,000 + (7,000 ÷ 2)
= 21,000 + 3,500
= 24,500 units
Danger Level (DL)
= Average consumption x Maximum ROP
= 9,000 units x 4 weeks
= 36,000 units
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PROBLEMS AND ANSWERS OF STOCK LEVEL |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1A
The extracted data are taken from ABC Manufacturing Company:
|
Maximum consumption in one day |
1,200 kg |
|
|
Maximum re-order period for materials receive |
5 days |
|
Required: Re-order level
[Answer: ROL = 6,000 kg]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1B
The extracted data are taken from ABC Rice Mill:
|
Maximum stock level |
14,400 ton (360 days) |
|
Safety stock |
2,400 ton |
|
Lead time consumption |
24 days |
Required: (1) Daily consumption; (2) Re-order level
[Answer: Daily consumption = 40 ton; ROL = 3,360 ton]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1C
ABC Manufacturing Company has following information in respect of a material:
|
Re-order quantity |
4,000 kg |
|
Re-order period |
4 – 8 days |
|
Consumption per day: |
Minimum 600 kg |
|
|
Maximum 1,000 kg |
Calculate: (a) Re-order level; (b) Average consumption; (c) Minimum stock level; (d) Maximum stock level
[Answer: ROL = 8,000 kg; Average consumption = 800 kg;
MSL (MIN) = 3,200 kg; MSL (MAX) = 9,600 kg]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1D
The extracted data are taken from ABC Steel Industry:
|
Re-order period |
16 – 20 days |
|
Consumption |
4,000 – 6,000 tons |
Required: (1) Re-order level; (2) Minimum stock level
[Answer: ROL = 120,000 tons; MSL = 30,000 tons]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1E
Bhudev Process (P) Ltd has following information related to pulse:
|
Materials need per day |
2,000 – 3,000 tons |
|
Lead time |
6 – 8 days |
|
Economic order quantity |
25,000 tons |
Required: (1) Re-order level; (2) Maximum stock level
[Answer: (1) 24,000 tons; (2) 37 tons; *EOQ = ROQ]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1F
The following information has given by Hi-life Polymers (P) Ltd:
|
Minimum consumption |
6,000 kg per week |
|
Maximum consumption |
12,000 kg per week |
|
Re-order period |
6 – 8 week |
|
Economic order quantity |
7,200 kg |
You are required to find out:
(a) Re-order level; (b) Minimum stock level; (c) Maximum stock level; (d) Average stock level
[Answer: (a) 96,000 kg; (b) 33,000 kg; (c) 67,200 kg;
(d) 36,600 or 50,100 kg]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1G
APD Inverter Company has following information related to home UPS 600 VA:
|
Minimum consumption |
600 units per day |
|
Average consumption |
900 units per day |
|
Re-order period |
5 – 7 day |
|
Economic order quantity |
700 units |
Required: (1) Maximum consumption; (2) Re-order level; (3) Minimum stock level
(4) Maximum stock level; (5) Average stock level; (6) Danger level
[Answer: (1) 1,200 units; (2) 8,400 units; (3) 3,000 units;
(4) 6,100 units; (5) 3,350 units; (6) 6,300 units]
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