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.

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.

There are two ways of calculation this level of inventory:

1. If a company does not have a safety stock level:

$[[Reorderlevel|ReorderLevel]]=MaximumConsumption\cdot MaximumLeadPeriod$

1. If a company has a safety stock level:

$[[Reorderlevel|ReorderLevel]]=SafetyStock+(AverageConsumption\cdot AverageLeadPeriod)$

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.

$MaximumStockLevel=ReorderLevel-(MinimumConsumption\cdot MinimumLeadTime)+ReorderQuantity$

The maximum stock level depends on:

• 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.

$MinimumStockLevel=[[Reorderlevel|ReorderLevel]]-(AverageConsumption\cdot AverageLeadTime)$

The minimum stock level depends on:

• 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:

1. When the enterprise has no safety stock.

$AverageStockLevel={\frac {MaximumStockLevel+MinimumStockLevel}{2}}$

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.

$AverageStockLevel=SafetyStock+{\frac {ReorderQuantity}{2}}$

Examples of Stock level

1. Natural units: This is an example of measuring stock level by counting the number of items in stock. For example, a retailer selling office supplies may keep track of the number of paper clips, pens, and notebooks they have in stock.
2. Time units: This is an example of measuring stock level by calculating the time it takes to replenish the stock. For example, a restaurant may calculate the average time it takes to restock their inventory of food items.
3. Monetary units: This is an example of measuring stock level by calculating the monetary value of the items in stock. For example, a car dealership may calculate the total value of their inventory of vehicles.

Advantages of Stock level

Having an adequate stock level provides numerous advantages for a company, including:

• Reduced costs of inventory management and storage - as stock level is kept at an optimal level, the costs of managing, maintaining and storing inventory are decreased.
• Increased customer satisfaction - by ensuring that there is always sufficient stock available, customers can be sure that their requirements will be met.
• Improved cash flow - by not overstocking, the company can save money and use the funds for other purposes.
• Improved planning - by having a clear view of the inventory levels, the company can plan its production and sales more efficiently.
• Increased efficiency - as stock level is kept under control, the company can optimize its operations and maintain a higher level of efficiency.

Limitations of Stock level

Stock level has several limitations:

• High stock levels require high storage costs. When the warehouse is full of materials, companies need to pay for additional storage or rent a bigger warehouse.
• Too low stock levels can lead to stockouts, which can cause loss of sales, customer dissatisfaction, and damage to the company's reputation.
• If the stock level is inaccurate, it can lead to overstock or understock, resulting in idle inventory or excessive inventory at the wrong time.
• Stock level does not take into account the quality of the stock, so it is not possible to assess the quality of the materials.
• Stock level does not take into account the current market conditions, so it is not always possible to accurately predict the future demand for the materials.

Other approaches related to Stock level

• Stock level can also be optimized by setting up a replenishment system that can anticipate customer demand and ensure that the supply meets the demand. This can be done through systems such as point-of-sale data collection, demand forecasting, and inventory optimization.
• Companies can also use inventory tracking software to keep track of their stock levels in real time. This allows them to monitor their stock levels and make adjustments as needed.
• Companies can also use cycle counting to ensure that their stock levels are accurate. This method involves counting a small portion of the stock on a regular basis, instead of counting all of it at once. This helps to ensure that the stock levels are accurate and up to date.
• Another approach is to set up safety stock levels that are higher than the average stock levels. This ensures that the company has enough stock to cover any unexpected surges in demand.

These approaches can provide companies with the ability to optimize and maintain their stock levels, ensuring that they always have enough materials and products on hand to meet customer demand. By monitoring their stock levels, companies can also reduce their costs, as they will not need to purchase more than necessary. A summary of these approaches is that they can help companies to ensure that their stock levels remain accurate and up to date, as well as reduce their costs by avoiding unnecessary purchases.

Stock level — recommended articles

Maximum stock level — Inventory on hand — Ordering cost — Order point — Safety stock — Optimum size of the order — Inventory record — Inventory value — Cycle stock

References

• Bookbinder J.H., Lordahl A.E. (1989), Estimation of Inventory Re-Order Levels Using the Bootstrap Statistical Procedure, "IIE Transactions", issue 4.
• Hanif M. (2018), Cost and Management Accounting - I, McGraw Hill Education, Chennai.
• Lal J., Srivastava S. (2009), Cost Accounting, Tata McGraw-Hill Publishing Company Limited, New Delhi.
• Nyhuis P., Wiendahl H.P.(2009), Fundamentals of Production Logistic. Theory, Tools and Applications. Springer, Germany.
• Rajasekaran V., Lalitha R. (2011), Cost Accounting, Pearson, Delhi.
• Silver E.A., Pyke D.F., Thomas D.J. (2017), Inventory and Production Management in Supply Chains, CRC Press, USA.
• Tekin E., Gürler Ü., Berk E. (2001), Age-based vs. stock level control policies for a perishable inventory system, "European Journal of Operational Research", issue 2.
• Wild T. (2002), Best Practice in Inventory Management, Routledge, New York.
• Zhou Y.W., Yang S.L. (2005), A two-warehouse inventory model for items with stock-level-dependent demand rate, "International Journal of Production Economics", issue 2.

Footnotes

Author: Milena Kurczek