Explain the different levels of stock
Answers
There are four types of stock levels are :
- Lead Time
- Rate of consumption
- Natural of material
- Re-Ordering level
i) Lead Time:
A purchasing firm requires some time to process the order and time is also required by the supplier/vendor to execute the order. The time taken in processing the order and then executing it is known as lead time. It is essential to maintain some inventory during this period to meet production requirements.
ii) Rate of Consumption:
It is the average consumption of materials items in the industry. The rate of consumption will be decided on the basis of past experience and production plans.
iii) Nature of Material:
The nature of material also affects the minimum level. If a material is required only against special orders of the customer then minimum stock will not be required for such materials. Wheldon has given the following formula for calculating minimum stock level: Minimum stock Level = Re-ordering Level – (Normal Consumption x Normal Reorder Period)
iv) Re-ordering Level:
When the quantity of materials reaches a certain level then fresh order is sent to procure materials again. The order is sent before the materials reach minimum stock level.
Reordering level is fixed between minimum level and maximum level. The rate of consumption, number of days required to replenish the stocks, and maximum quantity of materials required on any day are taken into consideration while fixing reordering level.