Material Costing: Stock Levels

Introduction

• Topic: Maintaining stock levels in inventory control.
• Key stock levels to understand: Maximum, Minimum, Average, Reorder, Dangerous, and Buffer stock levels.

Inventory Control

• Definition: Ensuring sufficient goods are retained in stock to meet requirements without excessive overstocking (as per SEMA).
• Goal: Maintain balance between sufficient stock and overstock to avoid interruptions in production and minimize costs.

Stock Levels Overview

1. Reorder Level: Point at which a new order should be placed.
2. Reorder Quantity: Amount to order when reaching reorder level.
3. Maximum Stock Level: Highest limit of stock to maintain.
4. Minimum Stock Level: Lowest limit of stock required to avoid shortages.
5. Average Stock Level: Typical stock level maintained in inventory.
6. Danger Stock Level: Stock level kept for emergencies, below minimum level.
7. Buffer Stock: Extra stock maintained to handle sudden demand; usually below minimum level.

Understanding Reorder Level

• Graphical Representation: Stock level vs. Time graph.
  • Start with full stock, consume materials until reaching reorder level.
  • Place order; however, delivery takes time (lead time).
  • Continue consuming until reaching minimum level, then receive order, restocking to maximum level.

Lead Time

• Defined as the duration from placing an order to receiving it.
• Types of Lead Time:
  • Minimum Lead Time: Shortest possible delivery time.
  • Maximum Lead Time: Longest delivery time.
  • Average Lead Time: Calculated as (Minimum + Maximum) / 2.

Key Formulas

1. Reorder Level:

   • Formula 1: Maximum Consumption × Maximum Lead Time.
   • Formula 2: Minimum Stock Level + (Average Consumption × Average Lead Time).

2. Reorder Quantity (ROQ):

   • Quantity of materials to be ordered.
   • EOQ (Economic Order Quantity): Minimizes total ordering and carrying costs. Formula: ( EOQ = \sqrt{\frac{200 \times A}{C}} )
   • A = Annual consumption, C = Cost of placing one order.

3. Minimum Stock Level:

   • Formula: Reorder Level - (Average Consumption × Average Lead Time).

4. Maximum Stock Level:

   • Formula: Reorder Level + ROQ - (Minimum Consumption × Minimum Lead Time).

5. Average Stock Level:

   • Formula: Minimum Stock Level + (1/2 × Reorder Quantity).
   • Alternative Formula: (Maximum Stock Level + Minimum Stock Level) / 2.

6. Danger Stock Level:

   • Formula: Average Consumption × Lead Time for emergency purchase.

7. Buffer Stock:

   • No specific formula; defined as the quantity of stock below the minimum level.

Conclusion

• Understanding stock levels and their management is crucial for efficient inventory control and minimizing costs.
• All formulas and concepts discussed provide a framework for maintaining optimal inventory.