BCMC0016

MANAGEMENT OF
WORKING CAPITAL
Presented by:
Dr. Prateek Kumar Bansal
Asst. Professor
Re-order level, Other stock levels
 DETERMINATION OF STOCK LEVELS
In order to guard against under-stocking and
over-stocking, most of the large companies adopt
a scientific approach of fixing stock levels.
These levels are—
(i) Maximum level
(ii) Minimum level
(iii) Re-order/ ordering level
(iv) Danger level, etc.
 DETERMINATION OF STOCK LEVELS
These levels are not permanent and must be
changed to suit changing circumstances. Thus,
change will take place if consumption of
materials is increased or decreased or if in the
light of a review of capital available, it is
decided that the overall inventory must be
increased or decreased.
 DETERMINATION OF STOCK LEVELS
The Modern Inventory Management makes use
of research and statistical techniques in fixing
stock-levels. However, given below is the
description of various levels along with formula
that are commonly used in their computations.
 Factors Affecting Stock Levels :
Some of the factors which influence the stock levels are
• Anticipated rate of consumption,
• Amount of capital available
• Availability of storage space
• Cost of storing
• Procurement costs
• Reliability of suppliers
• Minimum order quantities imposed by suppliers
• Risk of loss due to (a) obsolescence (b)
Deterioration (c) Evaporation and (d) Fall in
market prices, etc.
 MAXIMUM STOCK LEVEL

This is that level above which stocks should not

normally be allowed to rise. The maximum
level may however, be exceeded in certain cases,
e.g., when usually favourable purchasing condition
arise. It is computed by the following formula :
Maximum Stock Level = Re-order level + Re-
order Quantity - (Mini. Consumption X Mini Re-
order Period)
 The following factors are taken into account
in setting this level:
• Rate of consumption of material
• Risk of obsolescence and deterioration
• Storage space available
• Cost of storage and insurance
• Availability of funds needed
• Seasonal considerations, e.g. bulk purchases
during seasons at low prices
 Cont..

• Reorder Quantity
• Restrictions imposed by Government or local
authority in respect of certain materials in
which there are inherent risk of fire, explosion,
etc.
The idea of setting maximum stock level is to
ensure-that capital is not unnecessarily blocked in
stores and also to avoid loss due to obsolescence
and deterioration
 MINIMUM STOCK LEVEL

It is that level below which stock should not

normally be allowed to fall. This is essentially a
safety stock and is not normally touched. In case
of stock falling below this level, there is a risk of
stoppage in production and thus top priority should
be given to the acquisition of fresh supplies. It is
computed by the following formula :
Minimum Stock Level = Reorder level - (Normal
Consumption X Normal reorder period)
 MINIMUM STOCK LEVEL

In fixing this level, the following factors are

considered :
• Rate of consumption
• The time required to acquire fresh supplies
under top priority conditions so that stoppage
in production can be avoided.
 RE-ORDER LEVEL OR ORDERING
LEVEL
This is that level of material at which purchase
requisition is initiated for fresh supplies. This level
is fixed somewhere above minimum level. This is
fixed in such a way that by re- ordering when
materials fall to this level, then in the normal
course of events, new supplies will be received
just before the minimum level is reached. It is
calculated with the help of following formula:
Re-order level = (Max. Consumption X Max. Re
—order Period)
 RE-ORDER LEVEL OR ORDERING
LEVEL
In fixing this level the following factors are taken
into consideration :
• Rate of consumption of the material
• Minimum level
• Delivery time
 DANGER LEVEL

This is a level at which normal issues of materials

are stopped and materials are issued for important
jobs only. This level is generally fixed somewhat
below the minimum level. When stock |reaches
danger level, urgent action is needed for the
replenishment of stock so that stoppage in
production can be avoided.
 DANGER LEVEL

Purchasing materials on an urgent basis results in

higher purchasing Cost. It is calculated with the
help of following formula :
Danger Level = (Normal Consumption X
Maximum re-order period under emergency
condition)
 AVERAGE STOCK LEVEL

It is calculated with the help of following formula :

Average Stock Level = ½*(Mini. Stock level +
Max. Stock level)
 Contact Details
Dr. Prateek Kumar Bansal
9457266001
prateek.bansal@gla.ac.in
Cabin No. 023 AB VI
Institute of Business Management
GLA University
Mathura
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Thank You

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