Maximum Stock Level
Maximum Stock Level is the upper limit of stock above which the stock should not be allowed to exceed under normal circumstances without the prior sanction of the management. The main object for fixing up the maximum stock level is to avoid undue investment of capital leading to loss of interest, obsolescence of materials and additional overheads in the form of higher rents etc.
Factors affecting to determine Maximum Stock Level
The maximum stock level is determined by taking into account the following factors:
(a) Normal consumption rate of material.
(b) Time required to obtain new supplies.
(c) Amount of working capital available.
(d) Availability of storage space.
(e) Economic order quantity.
(f) Cost of carrying inventory or cost of storage.
(g) Risk of deterioration in quality and obsolescence of materials.
(h) Seasonal considerations as to price and availability of material.
(i) Incidence of insurance costs which may be very important in case of certain types of costly materials.
(j) Inherent risks attached with materials and any restrictions imposed by the Government in this regard.
Formula to Calculate Maximum Stock Level
The maximum stock level can be determined by applying the following formula:
Maximum Stock level = Reorder Level + Reorder Quantity – (Minimum consumption per day/per week etc. x Minimum time required for delivery)
It can be represented yet by another formula:
Maximum Level = Re-order Level – Consumption during the time required to get supplies at minimum rate + Economic order size
Example
ZEE is a product manufactured out of the raw material ‘M’, ‘N’ and ‘Q’. Each unit of ZEE requires 10 Kg., 8 kg., and 6 kgs., of M, N and Q respectively. The reorder levels of ‘M’ and ‘N’ are 15,000 kgs. and 10,000 kg. respectively while the minimum level of ‘Q’ is 25,000 kgs. The weekly production of ZEE varies from 300 to 500 units, while the weekly average production is 400 units.
You are required to compute:
(i) The minimum stock level of M.
(ii) The maximum stock level of N
(iii)The reorder level
The following additional data are given:
M | N | Q | |
Reorder Quantity (in kgs.) | 20,000 | 15,000 | 20,000 |
Delivery (in weeks) | |||
Minimum | 2 | 4 | 3 |
Average | 3 | 5 | 4 |
Maximum | 4 | 6 | 5 |
Solution
(i) Minimum Stock Level of M = Reorder Level – (Normal consumption per week x Average time required to obtain suppliers)
= 15,000 kgs. – (400 units x 10 kgs. x 3 weeks)
= 15,000 – 12,000
= 3,000 kgs.
(ii) Maximum Stock Level of N = Reorder Level + Reorder Quantity – (Minimum consumption per week x Minimum time required to obtain supplies)
= 10,000 kgs. + 15,000 kgs. – (300 units x 8 kgs. x 4 weeks)
= 25,000 kgs. – 9,600 kgs.
= 15,400 kgs.
(iii) Reorder Level of Q:
= Maximum consumption per week x Maximum time required to obtain supplies
= 500 units x 6 kgs. x 5 weeks
= 15,000 kgs.