Stock level

Stock level

Stock level is an amount of enterprise's inventory of materials, semi-finished and finished products, which exist in a warehouse to the effective functioning of company. Adequate stock level (balance between too high and too low stock level) provides a stable company's activity and huge market advantage. Stock level is expressed in natural, time and monetary units[1].

Meticulous knowledge about stock level gives enormous opportunities in company management. It helps managers in determining supply needs in a short or a long time. Moreover, awareness of stock levels is useful when managers are making forecasts regarding the supply of raw materials. It is necessary for assessment of the company's solvency and in saving management too. Thanks to those facts it is visible how broad support is given to the managers by the knowledge of the level of stocks.

It is able to point out types of stock level such as:

1. Re-order level
2. Minimum stock level
3. Maximum stock level
4. Average stock level

Re-order level

According to M. Hanif "Re-order level is the point at which an order is placed with a supplier for the replenishment of stock" (M. Hanif 2018, p. 3.43) It depends on orders quantity, the volume of consumption and lead time of order[2].

There are two ways of calculation this level of inventory:

1. If a company does not have a safety stock level$[[Reorder level|Reorder Level]]= Maximum Consumption \cdot Maximum Lead Period$
2. If a company has a safety stock level$[[Reorder level|Reorder Level]]= Safety Stock+(Average Consumption \cdot Average Lead Period)$

Maximum stock level

Maximum stock level is the highest point above which the stock cannot rise. The maximum stock level indicates that the warehouse is overloaded and it is necessary to take appropriate steps to reduce the amount of inventory. This stock level takes the re-order level as a base and points out that the volume of consumption is minimum and deliveries are made too quickly.

$$Maximum Stock Level= ReorderLevel-(Minimum Consumption \cdot Minimum Lead Time)+Reorder Quantity$$

The maximum stock level depends on[3]:

• Re-order level,
• Re-order quantity,
• Size of storage space,
• Amount of funds,
• Delivery of the order in time,
• The rate of the perishability of goods,
• Government policies
• The season for raw material (in the season raw materials are available more easily and occur at an affordable price, which gives the opportunity to accumulate more stock of them.)

Minimum stock level

Minimum stock level is the lowest line of inventory in a warehouse, below which materials cannot fall. It informs the materials staff about need to pay attention to the stock level. On the one hand, when a warehouse and logistic work go on schedule and there are no problems with the consumption of materials, then the minimum stock level is a flexible line which gives a margin of safety. On the other hand, if there are any deviations from these factors a person, who is responsible for inventory, needs to take compulsory action to avoid a lack of liquidity of a stock.

$$Minimum Stock Level=[[Reorder level|Reorder Level]]-(Average Consumption \cdot Average Lead Time)$$

The minimum stock level depends on[4]:

• Re-order level,
• Delivery of order in time,
• The number of suppliers (the fewer suppliers, the higher the minimum level of stock),
• Consumption scheme of material,
• Possibility to reach the materials from the local market,

Average stock level

There are two ways of calculating the average stock level[5]:

1. When the enterprise has no safety stock.

$$Average Stock Level=\frac{Maximum Stock Level+Minimum Stock Level}{2}$$

1. When the enterprise has safety stock. Moreover, the material's consumption and lead time are not very varied and the ordering quantity does not change over time.

$$Average Stock Level=Safety Stock+\frac{ReorderQuantity}{2}$$

Footnotes

1. Nyhuis P., Wiendahl H.P.(2009), p. 223
2. Hanif M. (2018), p. 3.43
3. Lal J., Srivastava S. (2009), p. 89
4. Hanif M. (2018), p. 3.44
5. Hanif M. (2018), p. 3.45-3.46

Author: Milena Kurczek