optimum stock levels [Archive] - AAT Discussion Forums

pshevlin

04-09-03, 00:00

i am sitting my costing exam in december "old standard" and i can not get my brain around the three formulas for re-order level minimum stock level maximum stock level CAN ANY BODY HELP PLEASE! THANKYOU M.P.S

graham

05-09-03, 00:00

The re-order level is the point at which new stock should be ordered. Because of the costs of holding stock the aim is to hold the minimum stock consistent with not running out. In an ideal world therefore a delivery would arrive just as the last of the old stock is used. This can be achieved by setting the reorder level at the amount of stock that will be used whilst we wait for the delivery. The formula is: Maximum daily usage x lead time in days. This will ensure that the delivery arrives at the point that old stock is finished (but for safety's sake many firms will add a buffer stock to this. Maximum stock is the most that we can ever hold. If "star trek" technology was available, suppliers could beam the stock down to us and so the maximum stock would be the reorder level plus the reorder quantity. Whilst we still have to wait for that technology to arrive, the maximum stock is reorder quantity plus reorder level LESS the least amount of stock that we could use whilst we are awaiting the delivery. The formula is Reorder level + Reorder quantity - (Minimum lead time in days x Minimum usage in days). Minimum stock is the least we should have. Theoretically this should be zero (as you will understand if you followed what I said about reorder levels). However, zero is no use as a control level as it gives us no time to panic (i.e. do something to avert the problem of a tsock-out). It is usually set therefore a luittle higher than this to give us a "buffer" stock. One way of doing this is to use the formula: Reorder level - (Average usage in days x average lead time in days). Hope this helps Graham Blott

pshevlin

06-09-03, 00:00

Many thanks greham. your reply was a great help. My mind is a lot fresher today so I am seeing and understanding the formular alot easier. many thanks once again trisa