Maximum level of inventory is maximum quantity of material which have to keep in store. We should not keep the stock more than maximum level because if we keep more stock than maximum level it will increase the cost of capital because we do not need the stock more than maximum level. Excess stock than maximum level will increase the cost of storing.
Following are the factors which are kept in mind when we take the decision of maximum level of inventory.
If we consume the inventory with fast rate of consumption, we need more quantity. So, our maximum level of inventory should be high.
2. Rate of Deterioration
If there are more rate of deterioration which may normal or abnormal, we should keep the stock at low quantity.
3. Requirements in Production
If we have high demand and requirement in production, we should buy stock at large quantity. With this, we can get discount facility. We should also compare this discount with storage cost. If discount is more than storage cost, it will be good, if we keep large volume of stock.
4. Storage Cost
Storage cost is also big factor for deciding maximum level of inventory. If it is very low, we can keep excess stock from maximum level.
5. Insurance Cost
There is the risk of loss due to fire or any other reason. If insurance cost is very low, we can keep more stock than maximum level of inventory.
6. Availability of Storage Space
If our storage space is empty, we can use for storing excess quantity of stock than maximum level.
Reorder level + Economic Order quantity − (Minimum rate of usage × Minimum lead time)
Minimum Consumption 1000 per day
Delivery Time = 8 to 10 days
Reorder Level = 20000 units
Economic Order Quantity = 15000 units
Maximum Stock level = Reorder Level + EOQ - ( Minimum consumption X minimum reorder period)
= 20000 + 15000 - ( 1000 X 8)
= 35000 - 8000
= 27000 units
Following are the factors which are kept in mind when we take the decision of maximum level of inventory.
Factor Affecting Maximum Level of Inventory
1. Rate of ConsumptionIf we consume the inventory with fast rate of consumption, we need more quantity. So, our maximum level of inventory should be high.
2. Rate of Deterioration
If there are more rate of deterioration which may normal or abnormal, we should keep the stock at low quantity.
3. Requirements in Production
If we have high demand and requirement in production, we should buy stock at large quantity. With this, we can get discount facility. We should also compare this discount with storage cost. If discount is more than storage cost, it will be good, if we keep large volume of stock.
4. Storage Cost
Storage cost is also big factor for deciding maximum level of inventory. If it is very low, we can keep excess stock from maximum level.
5. Insurance Cost
There is the risk of loss due to fire or any other reason. If insurance cost is very low, we can keep more stock than maximum level of inventory.
6. Availability of Storage Space
If our storage space is empty, we can use for storing excess quantity of stock than maximum level.
Formula of Maximum Level of Inventory
Reorder level + Economic Order quantity − (Minimum rate of usage × Minimum lead time)
For Example
Minimum Consumption 1000 per day
Delivery Time = 8 to 10 days
Reorder Level = 20000 units
Economic Order Quantity = 15000 units
Maximum Stock level = Reorder Level + EOQ - ( Minimum consumption X minimum reorder period)
= 20000 + 15000 - ( 1000 X 8)
= 35000 - 8000
= 27000 units
what the negative value is indicate
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