In order to avoid any halt in the production process, there is a strong need to maintain a minimum level of materials in the store. This lowest level is called minimum level stock. If the level falls below this level, there are strong chances that production will stop in near future and as a result, goods would not be produced. This will result in severe losses to the organization.
Proper planning is crucial to make sure that stock level does not fall below the minimum level. This level is decided after careful and in-depth analysis of the lead time when fresh supply of new order would be available in the store.
Formula
Minimum level can be calculated using the following formula:
Minimum stock = Re-ordering point – (Normal usage x normal re-order period)
Example
Aero is engaged in the manufacturing of bed sheets and towels. It is unsure what level of minimum thread stock it should kept in its store department. Following data is available from its costing records:
Minimum consumption per week = 3,000 units
Maximum consumption per week = 4,500 units
Normally, 3,500 units of threads are consumed on a weekly basis and it takes around 20 – 25 days of ordering period to get the new supply of threads from the supplier.
Required
Calculate Minimum stock level from the information given above.
Solution
Normal re-order point = Maximum weekly consumption x Maximum re-order period = 4,500 x 25 = 112,500
Minimum stock = Re-ordering point – (Normal usage x normal re-order period) = 112,500 – (3,500 x 20) = 112,500 – 70,000 = 42,500 Units
The calculation shows above tells us that Aero must keep at least 42,500 units of minimum stock in its store in order to smoothly run its production process.
Learn aboutadvantages/ benefits of minimum stock level.
