Maximum level and Minimum

level of inventory

Concept And Meaning Of Minimum Stock Level

Minimum level or safety stock level is the level of
inventory, below which the stock of materials should not
be fall.

If the stock goes below minimum level, there is a

possibility that the production may be interrupted due to
shortage of materials.
In other words, the minimum level represents the
minimum quantity of the stock that should be held at all
times.

Minimum Level = Re-order Level - (Normal

Consumption x Normal Re-order Point)

Note : Normal Consumption here means Average

Reorder Level = Maximum Consumption x Maximum
Reorder Period

Maximum level is that level of stock, which is not

normally allowed to be exceeded. Beyond the maximum
stock level, a blockage of capital should be exercised to
check unnecessary stock. ...

It increases the carrying cost of holding unnecessary

inventory level. It is the opportunity cost of holding
inventory .
Maximum level = Reorder level + Reorder Quantity

(Minimum consumption x minimum reorder period )

The reorder point (ROP) is the level of inventory

which triggers an action to replenish that particular
inventory stock. It is a minimum amount of an item
which a firm holds in stock, such that, when stock falls
to this amount, the item must be reordered.

Average Stock Level : Minimum level + maximum level /2

Average Stock level = Minimum level + of Reorder
quantity .

Economic Order Quantity : EOQ was developed by F.N

Harris in 1915, EOQ is the size of purchase order which
minimizes total inventory cost under the assumed
conditions of certainty.

EOQ is the order quantity of inventory that minimizes the

total cost of inventory management .

Two most important categories of inventory cost is

ordering cost and carrying cost .

Ordering cost are costs that are incurred on obtaining

additional inventories . they are communicating the
order, transportation cost etc.
Carrying cost include represent the cost of holding
inventory . For eg . Storage cost , spoilage cost ,
supervision cost . etc

Total Inventory cost = Ordering cost + Carrying cost .

Assumptions :
Ordering cost = Carrying cost
Annual buying consumption is constant
Lead time is constant