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Maximum Level of Stock

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Maximum Level of Stock

Uploaded by

soulinachanda10
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Maximum Level of Stock

The maximum level of stock is the level above which a business does not or cannot hold
stock on its premises.

The maximum level of inventory could be described as the maximum capacity of a business
to stock goods (inventory or raw material) in its store, which may be due to reasons like
demand limitation of goods (in production or sales), the storage capacity of business,
rationed funds etc. The ‘maximum level of stock’ is usually achieved when those goods
arrive that were ordered at the ‘re-order level’ of the stock. This stock is then used in the
production process (in case of raw materials) or sold (in case of finished goods) and then
re-ordered again at the re-order level which again fills up the stock to the ‘maximum level’.
This is an ongoing process.

Formula:

The formula to calculate the maximum level of stock is given below:

Maximum Level = Re-order level + Re-order quantity – (Minimum usage × Minimum lead
time)

Reorder level of stock (also known as reorder point or ordering point) in a business is a
preset level of stock or inventory at which the business places a new order with its suppliers
to obtain the delivery of raw materials or finished goods inventory. Every business has to
maintain a certain level of raw materials or finished goods in its store. This is done in order
to sustain the continuity of production in case of raw materials and the continuity of sales
in case of finished goods. For this purpose, the business must set a specific level at which
it should place a new order with the suppliers of inventory.

Formula:

The two formulas used to calculate the re-order level are given below:

1. When the business does not need to maintain safety stock:

Maximum demand or usage (in days, weeks or months) × Maximum lead time (in days,
weeks or months)

2. When the business needs to maintain a safety stock:

[Maximum demand or usage (in days, weeks or months) × Maximum lead time (in days,
weeks or months)] + Safety stock\

What is lead time?

The timing difference between placing an order with the supplier and arrival of the goods
is known as the lead time.
What is safety stock (also known as buffer stock)?

In some scenarios, it may be unlikely that the reorder level could be estimated accurately.
This is because the demand and the lead time of the goods could differ than the usual trends
and in that case the business may run out of stock. So, a level of safety stock is set to avoid
such a condition. It is also known as buffer stock.

Example 1 – reorder level without safety stock

The David IT Store sells 500 laptops on average in a week. The maximum demand in a
week is 523 laptops. If, the lead time is 4.5 weeks then the reorder level would be:

Reorder level = Maximum weekly usage × Lead time in weeks

= 523 units × 4.5 weeks

= 2,354 units

It means that every time the number of laptops decreases to 2,354, the David IT Store must
place a new order.

Example 2 – reorder level without safety stock

A business manufactures tire. The average demand for the business is 645 tires/week and
the maximum demand is 670 tires/week. To manufacture one tire 3 kilos of rubber is
required as raw material. So, the production department of the business requires a
maximum of 2,010 (= 670 × 3) kilos of rubber per week. If the lead time to get rubber from
the supplier is 1.5 weeks, then the re-order level would be:

Reorder level = Maximum demand per week × Lead time in weeks

= 2,010 kilos × 1.5 weeks

= 3,015 kilos

The production department must place a new order when the raw material (rubber) reaches
3,015 kilos.

Example 3 – with safety stock

Usage or demand
Minimum demand: 390 sweaters per month
Average demand:420 sweaters per month
Maximum demand:435 sweaters per month
Safety stock: 120 sweaters

Lead time
Minimum lead time: 1.2 months

Average lead time: 1.5 months

Maximum lead time: 1.75 months

Required: Compute reorder level of Clothing Outlet.

Solution

Reorder level = (Maximum demand × Maximum lead time) + Safety stock

= (435 units × 1.75 weeks) + 120 units

= 761 units + 120 units

= 881 units

Example 3
The Maha Cutlery Outlet sells dinner sets. It provides you the following information:

• Maximum demand: 200 per week


• Average demand: 160 per week
• Minimum demand: 145 per week
• Maximum lead time: 2 weeks
• Average lead time: 1.5 weeks
• Minimum lead time: 1.35 weeks
• Re-order quantity per order: 500 dinner sets
• Safety stock: 184 dinner sets

Required: Compute the maximum level of stock of Maha Cutlery Outlet using above
information.

Solution

Maximum Level of Stock = Reorder level + Reorder quantity – (Minimum usage ×


Minimum lead time)
= Reorder quantity – (Minimum usage × Minimum lead time)
= 584 units + 500 units – (145 units × 1.35 days)
= 584 units + 500 units – 196 units
= 1,084 units – 196 units
= 888 units

*Reorder level = (Maximum usage × Maximum lead time) + Safety stock


= (200 units × 2 days) + 184 units
= 400 units + 184 units
= 584 units

Example 4
A company manufactures wooden chairs. To manufacture one chairs the company needs 2
square feet of wood.

Demand:

• Maximum demand: 550 chairs per month


• Average demand: 510 chairs per month
• Minimum demand: 485 chairs per month

Lead time of the supplies:

• Maximum lead time: 2.5 months


• Average lead time: 2 months
• Minimum lead time: 1.75 months

Stock levels:

• Safety stock: 600 square feet of wood


• Re-order quantity: 496 square feet of wood
• Maximum stock level: ?

Required: Compute maximum stock level.

Solution

• The maximum usage: 550 Chairs × 2 sq. ft. = 1,100 sq.ft.


• The minimum usage: 485 Chairs × 2 sq. ft. = 970 sq. ft.

Maximum level of stock = Re-order level + Re-order quantity – (Minimum usage ×


Minimum lead time)

= *3,350 sq. ft. + 496 sq. ft. – (970 sq. ft. × 1.75 days)
= 3,350 sq. ft. + 496 sq. ft. – 1,698 sq. ft.
= 3,846 sq. ft. – 1,698 sq. ft.
= 2,148 sq. ft.

So, the maximum level of wood as raw material that can be stored is 2,148 square feet per
month.

*Reorder level = (Maximum usage × Maximum lead time) + Safety stock


= (1,100 sq. ft. × 2.5 days) + 600 sq. ft
= 2,750 sq. ft. + 600 sq. ft.
= 3,350 sq. ft.

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