Maximum level of stock

The maximum level of stock is the level above which a business does not or cannot hold stock in its premises.

The maximum level of inventory could be described as the maximum capacity of a business to stock goods (inventory or raw material) in its store, which may be due to reasons like demand limitation of goods (in production or sales), the storage capacity of business, rationed funds etc. The ‘maximum level of stock’ is usually achieved when those goods arrive which were ordered at the ‘re-order level’ of the stock. This stock is then used in the production process (in case of raw materials) or sold (in case of finished goods) and then re-ordered again at the re-order level which again fills up the stock to the ‘maximum level’. This is an on-going process.

Formula:

The formula to calculate maximum level of stock is given below:

Maximum Level = Re-order level + Re-order quantity – (Minimum usage × Minimum lead time)

Example 1

The Maha Cutlery Outlet sells dinner sets. It provides you the following information:

• Maximum demand: 200 per week
• Average demand: 160 per week
• Minimum demand: 145 per week
• Maximum lead time: 2 weeks
• Average lead time: 1.5 weeks
• Minimum lead time: 1.35 weeks
• Re-order quantity per order: 500 dinner sets
• Safety stock: 184 dinner sets

Required: Compute maximum level of stock of Maha Cutlery Outlet using above information.

Solution

Maximum Level of Stock = Reorder level + Reorder quantity – (Minimum usage × Minimum lead time)
= Reorder quantity – (Minimum usage × Minimum lead time)
= *584 units + 500 units – (145 units × 1.35 days)
= 584 units + 500 units – 196 units
= 1,084 units – 196 units
= 888 units

*Reorder level = (Maximum usage × Maximum lead time) + Safety stock
= (200 units × 2 days) + 184 units
= 400 units + 184 units
= 584 units

Example 2

A company manufactures wooden chairs. To manufacture one chairs the company needs 2 square feet of wood.

Demand:

• Maximum demand: 550 chairs per month
• Average demand: 510 chairs per month
• Minimum demand: 485 chairs per month

Lead time of the supplies:

• Maximum lead time: 2.5 months
• Average lead time: 2 months
• Minimum lead time: 1.75 months

Stock levels:

• Safety stock: 600 square feet of wood
• Re-order quantity: 496 square feet of wood
• Maximum stock level: ?

Required: Compute maximum stock level.

Solution

• The maximum usage: 550 Chairs × 2 sq. ft. = 1,100 sq.ft.
• The minimum usage: 485 Chairs × 2 sq. ft. = 970 sq. ft.

Maximum level of stock = Re-order level + Re-order quantity – (Minimum usage × Minimum lead time)

= *3,350 sq. ft. + 496 sq. ft. – (970 sq. ft. × 1.75 days)
= 3,350 sq. ft. + 496 sq. ft. – 1,698 sq. ft.
= 3,846 sq. ft. – 1,698 sq. ft.
= 2,148 sq. ft.

So the maximum level of wood as raw material that can be stored is 2,148 square feet per month.

*Reorder level = (Maximum usage × Maximum lead time) + Safety stock
= (1,100 sq. ft. × 2.5 days) + 600 sq. ft
= 2,750 sq. ft. + 600 sq. ft.
= 3,350 sq. ft.