Fixation of various inventory levels facilitates initiating of proper action in respect of the movement of various materials in time so that the various materials may be controlled in a proper way. However, the following propositions should be remembered.
(i) Only the fixation of inventory levels does not facilitates the inventory control. These has to be a constant watch on the actual stock level of various kinds of materials so that proper action can be taken in time.
(ii) The various levels fixed are not fixed on a permanent basis and are subject to revision regularly.
The various levels which can be fixed are as below.
It indicates the level above which the actual stock should not exceed. If it exceeds, it may involved unnecessary blocking of funds in inventory while fixing this level, following factors are considered.
i) Maximum usage.
2) Minimum Level: It indicates the level below which the actual stock not reduce, If it reduces, it may involve the risk of non-availability of material whenever it is required. While fixing this level, following factors are considered.
3). Re-order level
It indicates that level of material stock at which it is necessary to take the steps for the procurement of further lots of material. This is the level falling in between the two existences of maximum level and minimum level and is fixed in such a way that the requirements of production are met properly till the new lot of material is received.
4). DANGER LEVEL:
This is the level fixed below minimum level. If the stock reaches this level, it indicates the need to take urgent action in respect of getting the supply. At this stage, the company may not be able to make the purchases in the systematic manner but may have to make rush purchases which may involve higher purchase cost.
CALCULATION OF VARIOUS LEVELS:
The various levels can be decided by using the following mathematical expressions.
1). Re-Order level:-
Maximum lead time X Maximum usage.
2). Maximum level:-
Re-order level + Re order Quantity- (Minimum Usage X Maximum lead time)
3). Minimum level:-
Re-order level- (Normal usage + Normal lead time)
4). Average level:-
Minimum level + Maximum level
5). Danger level:-
Normal Usage X Lead time for emergency Purchases.
Formula no.2) of Maximum level as mentioned above is wrong i.e. Re-order level + Re order Quantity- (Minimum Usage X Maximum lead time).
Correct formula is Re-order level + Economic Order Quantity(EOQ)-(Minimum Usage X Minimum lead time)