STOCK LEVEL
The level at which any item of stock to hold is difficult to determine with the two dangers always present in either running out of stock of an item with all the problems that would follow, or of overstocking of an item, and thereby trying up necessary capital- the main determinants of stock level are-
- The max and min forecast usage figures for the trading period, based on the volume forecast of sales and past history.
- The reordering time for the items
- The economic ordering quantity
- Market trends-change in price and scarcity
- The storage space available, the shelf life of the item and budget available for the purchasing.
These determinants are beyond the control of the purchasing manager however his contribution must be to work towards the investments stock and rate of turnover. It is convenient to examine the stock of an item in three parts.
- The buffer stock – The minimum stock that will always exist. If the purchasing goes according to plan and if the purchasing does not go according to the plan the buffer stock would be used until further supplies were obtained.
- The working stock being the stock in use, which would rise and fall as each batch is received and issued.
- The recorded level is the level, which the stock in hand has reached. When it is necessary to make further order. So as to prevent running out of stock. This level would be set in advance for each item and has to be at least enough cover any normal future demand and also the reordering time may be greater than previously. It is usual when attempting to secure an acceptably low risk of stock out to include in the reorder a buffer stock is a protection against the problem occurring.
MAXIMUM STOCK LEVEL– This is level beyond which should not be maintained. The main objective is to avoid overstocking and thereby using working capital in a proper way.
SAFETY STOCK OR BUFFER STOCK:– It is very difficult to predict usage and the lead time. The demand for the material may fluctuate from the normal lead-time. If the actual usage increases or the delivery of the inventory is delayed the firm can face the problem of stock out. The stockout can prove to be costly for the firm therefore in order to guard against the stock out the firm may maintain a safety stock or buffer inventories caution against expected increase usage or delay in delivery time.
REORDER POINT:- The problem of how much to order, is solved by determining the economic order quantity, yet the answer should be solved to the second problem when to order. This is the problem of determining the order or reorder point. The reorder point is an inventory level at which an order should be placed to replenish the inventory. To determine the reorder point under certainty we should know
- The lead – time
- The average usage,
- EOQ.
The LEAD – TIME is the time taken in receiving the delivery of inventory after the order has been placed.
REORDER POINT = LEAD TIME / AVERAGE USAGE
E.g – The reasonably expected stock out is 25 units per week. The firm should maintain a safety stock of 75 units. (25 units x 3 weeks). Thus the reorder will be 150 units + 75 units = 225 units
MINIMUM LEVEL OF STOCK – This is the level of stock under no circumstance fall below this level. If the stock level falls below this limit than the operations will jeopardize.
