Setting of Reorder Level, Maximum Level, Minimum Level
(i) Maximum Level of Stock = (Reorder Level + Reorder Quantity) – (Minimum rate of consumption x Minimum reorder period)
Maximum Level may be alternatively fixed as Safety Stock + Reorder Quantity or EOQ.
(ii) Minimum level of stock = Reorder level – (Average rate of consumption x Average reorder period)
(iii) Safety Stock = (Annual Demand/365) x (Maximum Reorder Period – Average Reorder Period)
(iv) Reorder level or Ordering level = Maximum rate of consumption × Maximum reorder period. Alternatively, it will be = safety stock + lead time consumption
[lead time consumption will be = (Annual consumption -s- 360) × lead time]
(v) Danger level = It is slightly below the minimum level. It is a level at which special efforts should be made to obtain supplies of materials, i.e.
Minimum rate of consumption × Emergency delivery time
(vi) Average Stock level = (Maximum stock level + Minimum stock level) x 14 or Minimum Stock level + 14 Reorder Quantity.
Obviously, the Reordering level is below the Maximum level, and Minimum level is below the Reordering level and the Danger level is below the Minimum level. Safety Stock is above minimum level.
In above calculations, the following elements are important:
(a) Consumption Rate:
It is consumption or use of material per day (or per week) by production department. These rates will be maximum and minimum, the simple average of maximum and minimum rates is average consumption rate per day or per Week.
(b) Reorder Period:
It is period between materials ordered and materials received. The average reorder period is simple average of maximum and minimum reorder periods.
(c) Reorder Quantity:
At the time of purchase of material, one of the important problems to be faced is how much quantity of a particular materials to be purchased at a time. If purchases are made frequently in small quantities it will result in loss of trade discounts and economies in purchasing. On the other hand if purchases are made in large quantities it will lead to over stocking and cost of storage will be high. The ordering quantity should be economic and reasonable by all aspects. It should be Economic Order Quantity (EOQ). The calculation of EOQ has been discussed later on.