MAXIMUM STOCK LEVEL - Quantitative Techniques for management

Maximum Stock Level Example

The maximum level is that level of stock which can be held at any time. In other words, it is the level beyond which stock should not be maintained. The purpose is to avoid over-stocking and thereby using working capital in a proper way.

Maximum level can be calculated by applying the following formula:

Maximum Level = Re- order level + Re-order quantity – Minimum consumption × Minimum Re-order period
Or
= Re-order level + Re-order Quantity – (Average rate of usage × Lead Time)

Factors Affecting the Maximum Stock Level

These are as follows:

  1. Rate of consumption of the material.
  2. The lead time.
  3. The maximum requirement of the material at any point of time.
  4. Nature of the Material: The materials which deteriorate quickly are stored as minimum as possible.
  5. Storage space available for the material
  6. Price Economy: Seasonal materials are cheap during the harvesting reasons. So maximum purchase is made during that season and as a result the maximum level is high.
  7. Cost of storage and insurance.
  8. Cost of the material and the finance available. When the material is costly the maximum level is likely to be relatively low. If the price is likely to go up maximum level should be high
  9. Inventory Turnover: In case of slow moving materials the maximum level is low and in case of quick moving material it is high.
  10. Nature of Supply: If the supply is uncertain the maximum level should be as high as possible.
  11. Economic Order Quantity (EOQ): Maximum level largely depends in economic order quantity, because unless otherwise contra indicated the economic order quantity decides the quantity ordered and hence decides the maximum level.

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