Danger level of stock

In addition to minimum and maximum levels, some companies also determine the danger level of stock. At this level of stock, companies need to take emergency steps to acquire materials or inventories immediately otherwise the business operations would be stopped.

The danger lave of stock is an alarming situation in which companies prefer to place order with the supplier that can deliver the inventory in shortest possible time.

Danger level is not an ideal stock level to place an order because at this level the companies need to make the materials or inventory available on urgent basis which could increase transportation charges and overall inventory cost.

Formula

The danger level of stock is computed by using the following formula:

Average daily usage × Lead time for the emergency supply

Example 1

A gadget store sells portable game sets. Each set has a cost of $248. The Average Demand for the game sets per day is 56 units. The normal lead time of the supplier of the store is 13 days, while the lead time to get the game sets in case of emergency situations is 5 days.

Required: Compute the danger level of stock.

Solution

Danger Level of Stock = Daily average demand × lead time for emergency situations
= 56 Units × 5 days
= 280 Units

Example 2

A company exports juicers in a neighboring country. The average annual demand in the market is 180,000 juicers. The average lead time of the supplier is 1.5 months. The lead time for emergency supplies is 20 days. (Use 365 days in a year).

Required: Determine the danger level of stock.

Solution

Danger level of stock = Average daily demand × Lead time for emergency supplies
= *500 units × 20 days
= 10,000 units

*Average daily demand: 180,000/365 = 500 units

Example 3

A company manufactures shirts. Each shirt is prepared by using 1.25 meters of cloth. The details about demand and lead time are given below:

• Average demand for shirts per day: 250 units
• Maximum demand for shirts per day: 300 units
• Minimum demand for shirts per day: 200 units
• Average lead time: 30 days
• Lead time for emergency supplies: 7 days
• Danger level of stock of cloth: ?

Solution

Danger level = Average daily usage × Lead time for emergency situations
= *375 Meters × 7 Days
= 2,625 meters

*The average daily usage of cloths: 300 units × 1.25 meters = 375 meters