STOCK LEVELS

Illustration 4:
The following data relates to a firm for the last twelve months:
Minimum usage of a component 50 units/ week
Maximum usage 120 units/ weeks
Normal usage 80 units/ week
Delivery period varies from 4 to 6 weeks. Orders are placed for 500 units at a time. Calculate
maximum level and minimum level for the component.
[ICWA Inter, adapted]

Solution:
(a) Re-order Level = Maximum usage x Maximum re-order period
= 120 × 6 = 720 units
(b) Minimum Level = Re-order level - (Normal usage x Averge re-order period)
= 720 – (80 x 5) = 320 units
(c) Maximum Level = Re-order level + Re-order quantity - (Minimum usage x Minimum re-
order period)
= 720 + 500 – (50 × 4) = 1,020 units
(d) Average Level = Minimum Level + Maximum Level / 2
= 1,020 + 320 / 2 = 670 units
Alternatively, Average Stock Level = Minimum level + (1/2 x Re-order quantity)
= 320 + ½ x 500 = 570 units

Working Note:-
Average Usage 50 + 120 / 2 = 85 units
Average re-order period = 4+6/2 = 5 weeks
Illustration 5:
The following information is available in respect of material:
Re-order quantity = 1,500 units
Re-order period = 4 - 6 weeks
Maximum consumption = 400 units per week
Normal consumption = 300 units per week
Minimum consumption = 250 units per week
Emergency Re-order period = 2 weeks

Calculate:
(a) Re-order level
(b) Minimum level
(c) Maximum level and
(d) Average stock level
(e) Danger level

Solution:
(a) Re-order Level = Maximum consumption x Maximum Lead Time
= 400 × 6 = 2,400 units
(b) Minimum Level = Re-order level - (Normal consumption x Average re-order period)
= 2,400 – (300 × 5) = 900 units
(b) Maximum Level = Re-order level + Re-order Quantity - (Minimum consumption x
Minimum re-order period)
= 2,400 + 1,500 – (250 × 4) = 2,900 units
(d) Average Level = Minimum Level + Maximum Level / 2
= 900 + 2,900 / 2 = 1,900 units
Alternatively, Average Stock Level = Minimum level + (1/2 x Re-order quantity)
= 900 + (1/2 x 1,500) = 1,650 units
(e) Danger Level = Average consumption x Emergency re-order period
= 325 x 2 = 650 units

Working Note:-
Average re-order period = 4+6/2 = 5

Average Usage = 400 + 250 / 2 = 325

Illustration 6 :
Two components, A and B, are used as follows:
Normal usage 50 units per week each
Minimum usage 25 units per week each
Maximum usage 75 units per week each
Re-order quantity A: 300 units
B: 500 units
Re-order period A: 4 to 6 weeks
B: 2 to 4 weeks
Calculate for each component :
(a) Re-order level
(b) Minimum level
(c) Maximum level and
(d) Average stock level
(CA-Inter, May 95; FYBAF Nov. 2017, Mar. 2017)
Solution:
(a) Re-order Level = Maximum consumption x Maximum re-order period
A = 75 × 6 = 450 units
B = 300 units
(b) Minimum Level = Re-order level - (Normal consumption x Average re-order period)
A = 200 units
B = 150 units
(b) Maximum Level = Re-order level + Re-order Quantity - (Minimum consumption x
Minimum re-order period)
A = 650 units
B = 750 units
(d) Average Level = Minimum Level + Maximum Level / 2
A = 200 + 650 / 2 = 425 units
B = 450 units
Alternatively, Average Stock Level = Minimum level + (1/2 x Re-order quantity)
A = 200 + (1/2 x 300) = 350 units
B = 400 units

Working Note:-
Average re-order period

A = 4+6/2 = 5

B = 2+4/2 = 3
Illustration 7:
For the manufacture of a certain product two components A and B are used. The following
particulars about these components are available:
А B
Normal usage (per week) 60 nos. 60 nos.
Maximum usage (per week) 80 nos. 80 nos.
Minimum usage (per week) 30 nos. 30 nos.
Reorder quantity 400 nos. 600 nos.
Reorder period 4 to 6 weeks 2 to 4 weeks
You are required to calculate for each component :
(i) Re-ordering Level
(ii) Minimum Level
(iii) Maximum Level
(iv) Average Stock Level. (ICWA Inter, June 2004, adapted)

Solution:
(i) Re-order Level = Maximum consumption * Maximum Re-order period
A=
B=
(ii) Minimum Level = Re-order Level – (Normal consumption * Average Re-order period)
A=
B=
(iii) Maximum Level = Re-order Level + re-order Quantity – ( Minimum consumption –
Minimum Re-order period)
A=
B=
(iv) Average stock level = Minimum Level + Maximum Level / 2
A = 180+760 / 2 = 470 nos.
B = 140+860 / 2 = 500 nos

Working Note:
Average Re-order
A = 4+6 / 2 = 5
B = 2+4 / 2 = 3
Q.1, Pg114
(a) Re-order Level = Maximum consumption x Maximum re-order period
=
(b) Minimum Level = Re-order level - (Normal consumption x Averge re-order period)
=
(c) Maximum Level = Re-order level + Re-order quantity - (Minimum consumption x
Minimum re-order period)
=
(d) Average Level = Minimum Level + Maximum Level / 2
= 2,550 + 7,500 / 2 = 5,025 units
Alternatively, Average Stock Level = Minimum level + (1/2 x Re-order quantity)
= 2,550 + ½ x 3,600 = 6,530 units

Working Note:-
Average re-order period = 10+15/2 = 12.50

Q.2, Pg114
(a) Re-order Level = Maximum consumption x Maximum re-order period
= 600 x 6 = 3,600 units
(b) Minimum Level = Re-order level - (Normal consumption x Averge re-order period)
= 3,600 – (450 x 4) = 1,800 units
(c) Maximum Level = Re-order level + Re-order quantity - (Minimum consumption x
Minimum re-order period)
= 3,600 + 1,500 – (400 x 2) = 4,300 units
(d) Average Level = Minimum Level + Maximum Level / 2
= 1,800 + 4,300 / 2 = 3,050 units
Alternatively, Average Stock Level = Minimum level + (1/2 x Re-order quantity)
= 1,800 + ½ x 1,500 = 2,550 units
(e) Danger Level = Average Consumption x Emergency reorder period
= 500 x 1 = 500

Working Note:-
Average re-order period = 6+2/2 = 4

Average usage = 400 + 600/2 = 500