Maximum stock level

Maximum stock level
See also
Inventory on hand Cycle stock Buffer inventory Discount pricing Inventory value Stock level Baumol model Safety stock Two-tier inventory control

Maximum Stock level is amount that cannot be exceeded in planning supply, one of the control parameters in the ordering system based on a periodic review, understood as the sum of demand in the replenishment cycle and the review cycle plus the safety reserve. (maximum stock) Stock level planned as a quantity to which the stock can grow without the need to take intervention measures. It is expressed in quantitative or valuable units .

Calculation

It is calculated basing on storing cost, average size and amount of orders, consumption of materials possibility of the product becoming dated, insurance cost. Limited warehouse space also needs to be added to calculation as per good which need to be storage in special conditions such as low temperature, humidity of the room etc. . Once we storage rather minor and inexpensive products that are not highly likely to become dated, our maximum stock level will be high. Obversely, the level of products stored will be low if we hold larger and expensive offerings with short durability. That is why maximum storage level for fashionable, expensive clothes, high technology etc. will be much lower. Maximum stock level is mostly affected by available space, funds, risk and chances of loss, ratio of lead time and usage frequency, pedictable market, law, price and season changes. When defining maximum stock level, we need to observe at which point stock level decline to Re-order level. Then we make an order as per Re-order quantity. As we need to consider delivery time and that during this time, products will be consumed, the daily usage and delivery Leadtime are taken into account .

• Maximum Stock level = ROL + ROQ - (Daily usage x Leadtime in days)

Inventory control

It is a process aiming to maximize profit and use of stock available in warehouses etc. with minimalizing costs if storage. Except current resources, inventory control tries to predict future changes. Inventory control is essential to efficient stock management.

Stock Management

It is managing orders, storing, tracking and controlling stock. Stock control takes into account availability of raw materials, finished goods, work in process, reorder point, bottleneck enhancement, and all the stages up to finished goods. In order to hold stock at efficient level, minimize costs of storage and maximize profit the demands and supply on market need to be controlled as well .

Types of stock management

We distinguish two main kinds of stock management systems.

• Periodic stock management- based on physical check at particular intervals. This option is highly recommended for small businesses as advanced electronic tracking system is not required per small inventory.

Big companies may find it awkward as per time consumption and difficulty in physically accessing all the goods.

• Perpetual stock management- oppositely to periodic stock management this type consists in electronic tracking systems and constantly logs and track storage. It is more expensive but more accurate, time saving and risk minimizing than the previous method.

Just in Time

As per increasing pressure to reduce storage JiT method is thriving in popularity . Just-in-time establish that the exact amount of good ordered by customer is produced and delivered to him. This aims to minimizing waste of time within production, money for storing and space required for inventory .

Examples of Maximum stock level

• Maximum stock level can be set as the maximum amount of an item that a company can have in its inventory. For example, a company may set its maximum stock level for a particular item to 500 units. This means that once the stock reaches 500 units, the company will need to take intervention measures to reduce the stock level.
• Maximum stock level can also be set for certain products that are perishable or have a limited shelf life. For example, a bakery may set a maximum stock level for a particular type of bread to be 15 loaves per day. If the bakery produces more than 15 loaves of bread in a day, any excess bread must be sold or thrown away.
• Maximum stock level can also be set for items with a high turnover rate. For example, a retail store may set a maximum stock level for a particular type of clothing to be 200 items. This means that the store will only keep 200 items of that clothing in stock at any given time, and will need to replenish the stock when it reaches below 200 items.

Advantages of Maximum stock level

The advantages of having a maximum stock level include:

• Improved inventory control, as it allows for better planning and management of the supplies.
• Reduced risk of overstocking, leading to lower costs associated with storing and managing excess inventory.
• Increased flexibility in responding to changes in demand, as the maximum stock level allows for the adjustment of the supply chain to meet current and future needs.
• Reduced lead time, as the maximum stock level helps to ensure that the goods are available in a timely manner.
• Increased efficiency in production, as the maximum stock level allows for a more streamlined process.

Limitations of Maximum stock level

The limitations of maximum stock level are:

• It may lead to overstocking as the stock level may exceed the actual demand.
• It does not take into account the demand variations and seasonality, which can lead to excessive inventory and high cost of capital.
• It does not allow for changes in customer demand or supplier lead time which could result in stock-outs and lost sales.
• It does not consider the cost of the product and the carrying cost associated with holding it in inventory.
• It does not take into account the availability of warehouse space, which can lead to overcrowding and difficulties in management.
• It does not allow for effective planning and control of inventory, making it difficult to manage stock levels efficiently.

Other approaches related to Maximum stock level

A Maximum Stock Level approach entails several considerations beyond just the amount of inventory to be held:

• Inventory Management: This includes proper tracking of inventory levels, ordering processes, and logistics.
• Forecasting: This involves setting realistic expectations for future demand as well as predicting how much stock should be held in order to meet customer needs.
• Cost Control: This requires analyzing the cost of holding inventory, as well as the cost of replenishing it.
• Risk Management: This includes assessing the risk associated with holding too much or too little stock.

In summary, Maximum Stock Level is a system of inventory control that takes into consideration the various elements of inventory management, forecasting, cost control, and risk management in order to maximize efficiency and minimize costs.

References

• Davenport T. H., & Glaser, J. (2002). Just-in-time delivery comes to knowledge management. "Harvard business review", 80(7), 107-11.
• Filippini R. Forza C. (2016). The Impact of the Just-in-Time Approach on Production System Performance: A Survey of Italian Industry. A Review and Outlook. "Springer International Publishing Switzerland", 19-39.
• Graves, S. C., & Willems, S. P. (2000). Optimizing strategic safety stock placement in supply chains. "Manufacturing & Service Operations Management", 2(1), 68-83.
• Haijema R. (2013). A new class of stock-level dependent ordering policies for perishables with a short maximum shelf life, "International Journal of Production Economics", 434-429.
• Houtum G., Kranenburg B. (2006). Spare Parts Inventory Control under System Availability Constraints, "Springer International Publishing Switzerland", 11-39.
• Patel J., Shah S., Thakkar P., Kotecha K. (2015). Predicting stock and stock price index movement using Trend Deterministic Data Preparation and machine learning techniques, "Expert Systems with Applications", 259-268.
• Zhou Y., Yang S. (2005). A two-warehouse inventory model for items with stock-level-dependent demand rate, "International Journal of Production Economics", 215-228.

Author: Anna Zalewska