Definition and Explanation of Minimum Stock Level
A minimum stock level is that level of an item of material, below which the actual stock should not normally be allowed to fall.
In other words, it refers to the minimum quantity of a particular item of material which must be kept in the stores at all times. The fixation of this level acts as a safety measure and hence, it is also known as ‘Safety Stock‘ or ‘Buffer Stock‘. In case the actual stock falls below this level, there is a danger of stoppage in production and the management has to give top priority to the acquisition of fresh supplies. The main objective of fixing the minimum level of materials is to ensure that the required quantity of each item is available in stores at all times.
Main factors involve in fixing the minimum stock level
The main factors which are taken into account in fixing the minimum stock level are:
(a) The average rate of consumption of materials.
(b) The time required to obtain fresh supplies under top priority conditions.
(c) Re-order level
(d) The production requirements as to materials.
(e) The minimum quantity of materials which could be procured advantageously.
Formula to determine the minimum stock level
The minimum stock level can be determined by applying the following formula:
Minimum Stock Level = Re-order Level – (Normal consumption per day/per week, etc. X Normal delivery time).
Following example can be taken to understand the calculation of minimum stock level:
Normal consumption = 300 units per week
Normal delivery time = 7 weeks
Re-order level = 2,400 units.
The minimum stock level will be equal to:
= Re-order level – (Normal consumption per day/per week, etc. x Normal delivery time).
= 2,400 – (300 x 7)
= 2,400 – 2,100 = 300 units
In a manufacturing concern, material ‘X’ is used as follows:
Maximum consumption = 9,000 units per week
Minimum Consumption = 3,000 units per week
Normal Consumption = 6,000 units
Re-order Quantity = 36,000 units
Time Required for delivery = 4 to 6 weeks
Time required for emergent supplies: 1 week
Calculate: Minimum Stock Level
As we know:
Minimum Stock Level = Re-order level – (Normal consumption per week x Average time required to obtain supplies)
Let’s calculate Re-order level fist:
= Minimum Consumption per week x Maximum time required to obtain suppliers
= 9,000 units x 6 weeks
= 54,000 units
Now we can calculate minimum stock level as:
= 54,000 units – (6,000 units x 5 weeks)
= 54,000 – 30,000
= 24,000 units
Note: Average time required to obtain suppliers has been ascertained as follows:
= (Minimum period + Maximum Period) / 2
= 4 weeks + 6 weeks / 2
= 5 weeks