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STOCK LEVELS
Fixation of Stock Level
Material control involves physical control of materials, preservation of stores, minimization of obsolescence and damages through timely disposal and efficient handling. Effective stock control system should ensure the minimization of inventory carrying cost and materials holding cost. Level of stock is the important aspect of inventory control. Stock level may be overstocking or understocking. Overstocking requires large capital with high cost of holding. In the case of understocking, production and overall performance of the concern as a whole will affect. Thus, fixation of stock level is essential to maintain sufficient stock for the smooth flow of production and sales. The following are the important techniques usually adopted in different industries:
(a) Maximum Stock Level.
(b) Minimum Stock Level.
(c) Danger Level.
(d) Re-Order Level.
(e) Economic Ordering Quantity (EOQ).
(f) Average of Stock Level.
Maximum Stock Level:
The maximum stock level indicates the maximum
quantity of an item should not be allowed to increase. The maximum quantity of an item can be held in stock at any time. The following factors can be considered while fixing the maximum stock levels:
(l) Availability of capital.
(2) Availability of floor space.
(3) Cost of storage.
(4) Possibility of fluctuation of prices in raw materials.
(5) Cost of insurance.
(6) Economic order of quantity.
(7) Average rate of consumption.
(8) Re-order level and lead time.
(9) Seasonal nature of supply.
(10) Risk of obsolescence, depletion, evaporation etc.
The maximum stock level can be calculated by the following formula:
Maximum Stock Level = Re-Order Level + Re-Ordering Quantity
(Minimum Consumption x Minimum Re- Ordering Period)
Minimum Stock Level
Minimum stock level indicates the minimum quantity of material to be maintained in stock. Accordingly, the minimum quantity of an item should not be allowed to fall. The minimum stock is also known as Safety Stock or Buffer Stock. The following formula is adopted for calculation of minimum stock level:
Minimum Stock Level = Re-Order Level – (Normal Consumption x Normal Re-Order Period)
Danger Level:
It is the stock level below the Minimum Level. This level indicates the danger point to affect the normal production. When materials reach danger level, necessary steps should be taken to restock the materials. If there is any emergency, special arrangements should be made for fresh issue. Generally this level is fixed above the minimum level but below the reordering level. The formula for determination of danger level is:
Danger Level = Average Rate of Consumption x Emergency Supply Time
Re-order Level:
Re-order level is also termed as ordering Level. It indicates when to order, i.e., orders for its fresh supplies. This is the stock level between maximum and the minimum stock levels. The re-order stock level is fixed on the basis of economic order quantity, lead time and average rate of consumption.
Calculation of re-order level is adopted by the following formula:
Re-order Level = Minimum Level + Consumption during the time to get fresh delivery
(or) Re-order Level = Maximum Consumption x Maximum Re-lording Period
Economic Order Quantity (EOQ):
Economic Order Quantity is one of the important techniques used to determine the optimum quantity or number of orders to be placed from the suppliers. The main objectives of economic order quantity is to minimize the cost of ordering, cost of carrying materials and total cost of production. Ordering costs include cost of stationery, salaries of those engaged in receiving and inspecting, general office and administrative expenses of purchase departments. Carrying costs are incurred on stationery, salaries, rent, materials handling cost, interest on capital, insurance cost, risk of obsolescence, deterioration and wastage of materials and evaporation.