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Maximum Level and Minimum Level of Inventory

The document discusses minimum and maximum inventory levels. The minimum level, or safety stock level, is the lowest level inventory should fall below, to avoid production interruptions from material shortages. The maximum level is the highest level inventory is normally allowed to exceed, as excess inventory increases holding costs. Reorder points trigger replenishing inventory levels. The economic order quantity minimizes total inventory costs by balancing ordering and carrying costs.

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390 views

Maximum Level and Minimum Level of Inventory

The document discusses minimum and maximum inventory levels. The minimum level, or safety stock level, is the lowest level inventory should fall below, to avoid production interruptions from material shortages. The maximum level is the highest level inventory is normally allowed to exceed, as excess inventory increases holding costs. Reorder points trigger replenishing inventory levels. The economic order quantity minimizes total inventory costs by balancing ordering and carrying costs.

Uploaded by

samirjswl
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Maximum level and Minimum

level of inventory

Concept And Meaning Of Minimum Stock Level


Minimum level or safety stock level is the level of
inventory, below which the stock of materials should not
be fall.

If the stock goes below minimum level, there is a


possibility that the production may be interrupted due to
shortage of materials.
In other words, the minimum level represents the
minimum quantity of the stock that should be held at all
times.

Minimum Level = Re-order Level - (Normal


Consumption x Normal Re-order Point)

Note : Normal Consumption here means Average


Reorder Level = Maximum Consumption x Maximum
Reorder Period

Maximum level is that level of stock, which is not


normally allowed to be exceeded. Beyond the maximum
stock level, a blockage of capital should be exercised to
check unnecessary stock. ...

It increases the carrying cost of holding unnecessary


inventory level. It is the opportunity cost of holding
inventory .
Maximum level = Reorder level + Reorder Quantity

(Minimum consumption x minimum reorder period )

The reorder point (ROP) is the level of inventory


which triggers an action to replenish that particular
inventory stock. It is a minimum amount of an item
which a firm holds in stock, such that, when stock falls
to this amount, the item must be reordered.

Average Stock Level : Minimum level + maximum level /2


Average Stock level = Minimum level + of Reorder
quantity .

Economic Order Quantity : EOQ was developed by F.N


Harris in 1915, EOQ is the size of purchase order which
minimizes total inventory cost under the assumed
conditions of certainty.

EOQ is the order quantity of inventory that minimizes the


total cost of inventory management .

Two most important categories of inventory cost is


ordering cost and carrying cost .

Ordering cost are costs that are incurred on obtaining


additional inventories . they are communicating the
order, transportation cost etc.
Carrying cost include represent the cost of holding
inventory . For eg . Storage cost , spoilage cost ,
supervision cost . etc

Total Inventory cost = Ordering cost + Carrying cost .

Assumptions :
Ordering cost = Carrying cost
Annual buying consumption is constant
Lead time is constant

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