Important Factors to be considered in fixing Stock Levels

Factors of Minimum Stock Level

The stock of materials should not be maintained below the minimum stock level at any cost. If so, the production will be affected. The following factors are to be considered while fixing the minimum stock level.

Factors to be considered in fixing Stock Levels
Factors to be considered in fixing Stock Levels

1. Nature of Material: If the materials are required by many production centres and received from many suppliers, the minimum stock level is maintained. If materials is a special item and received from only one supplier, there is no need for fixing minimum stock level.

2. Lead Time: Lead-time is the time required from the data of order to the date of actual delivery. If shorter the lead-time, lower is the minimum level, the re-order level remains constant.

3. Rate of Consumption of Materials: The minimum rate, the normal rate and maximum rate of consumption of raw materials are taken into account for fixing minimum level.

Minimum Stock Level =  Re-order Level — (Normal Consumption x Normal Re-order Period)

Factors of Maximum Stock Levels

It is the stock level of materials maintained at the maximum. Over and above the maximum stock level of materials is not kept at any time. The following factors are considered while fixing the maximum stock level of materials.

1. Rate of consumption of materials.

2. The lead-time.

3. The maximum requirement of the material at any time.

4. Nature of material: Some materials may loose its quality over a period of time. It so, minimum stock level of materials is maintained.

5. Storage space and facility available to maintain materials.

6. Price Economy: Some raw materials are available in plenty during harvesting season. For example: cotton and groundnut. If so, maximum purchase is made during the harvesting season to avail cheap price.

7. Cost of storage and insurance.

8. Cost of materials: The price of some raw materials is very high. If so, maximum level is likely to be low. In other words, if the cost of raw materials is very low, the maximum level should be high.

9. Availability of Finance: If more finance is available, the raw materials may be purchased up to the level of maximum stock and vice versa.

10. Inventory Turnover: In case of slow moving materials, the maximum stock level is low and in case of fast moving materials, the maximum stock level is high.

11. Nature of supply: If the supply of raw materials is uncertain, it is better to maintain maximum stock level of materials.

12. Economic Order Quantity (EOQ): Maximum stock level is largely depend on economic order quantify.

13. If the government frames rigid rules for import or procurement, the maximum stock level should be high.

Maximum Stock Level = Re-order Level + Re-order Quantity — (Minimum Consumption x Minimum Re-order Period)

Factors of Average Stock Levels

It is the stock level of mid point between the minimum stock level and maximum stock level. In other words, half of the re-order quantity is taken into account along with minimum stock level to find the average stock level.

Average Stock Level = (Minimum Level + Maximum Level) / 2
Average Stock Level = Minimum Level + ½ Re-order Quantity

Factors of Danger Levels of Stocks

It is the stock level of materials below which the stock should not be maintained. If so, the production centers are affected certainly. Whenever the materials are reached the danger level, the purchase department should take quick action to receive the materials as early as possible. Some companies may fix the danger level just below the re-ordering level but above the minimum level. If action for purchase is taken as soon as the materials reach the re-ordering level, the danger level bears no significance.

If danger level is fixed just below the minimum level, the purchase department should be alert in buying the materials. Hence, the fixation of danger level gets high significance in buying the materials.

Danger Stock Level = Minimum Consumption x Emergency Delivery Time