- A business organization must not have too much of the stock or too little of it.
Problems:a) Tie up capital in the stock.
b) There is risk of obsolesce
c) Costly in terms of storage facilities.
On the other hand, having too little of the stock may have the following problemsi) Lost customer goodwill.
ii) Costly in terms of speeding up orders.
iii) Low production which may lead to losses.
- Various levels of stock are as follows
1. Reorder level is the level at which new or fresh materials or stock is ordered to be requisitioned. In fixing reorder level the worst is assumed. i.e. The will be maximum consumption and maximum lead time.
Reorder level = maximum consumption x maximum lead time.
-Factors to consider in setting reorder level
i) Policy of the business
ii) Availability of stock e.g. seasonal variations of stock.
iii) Perishability of the stock.
iv) Demand of the commodity i.e. existing and future.
v) Economies of scale e.g. discount.
2. Minimum stock level is the level below which stock must not be allowed to fall.
Re-order level – normal consumption x normal lead time.
3. Maximum stock level is a level beyond which stock must not be to raise
Max stock level = reorder level + reorder quantity – minimum consumption x minimum lead time
4. Average stock level is the average of the maximum stock level and the minimum stock level.
Wilfykil answered the question on
August 5, 2019 at 12:09