Page 276 - DMGT207_MANAGEMENT_OF_FINANCES

Unit 12: Inventory Management

Main consideration for fixation of minimum level of inventory: Notes
1. Information about maximum consumption and maximum delivery period in respect of
each item to determine its reorder level.

2. Average rate of consumption for each inventory item.
3. Average delivery period for each item. Average delivery period = ½ (maximum period +
minimum period)

Formula:
Minimum level of inventory = Reorder level – (Average rate of consumption × Average
time of inventory delivery)

Maximum level: It indicates figure of inventory quantity held in stock at any time.
The following are the considerations that govern the fixation of maximum level for various
inventory items:
1. It’s reorder level. The reorder itself depends on the maximum rate of consumption and
maximum delivery period.
2. The knowledge about minimum consumption and minimum delivery period for each
inventory item.
3. The figure of economic order quantity.

4. The availability of funds, storage space, nature of item and their price per unit are also
important.
5. For imported material since of their irregular supply, the maximum level should be high.
Formula used for Calculation of Maximum Level of Inventory = Reorder level × Reorder quantity
– (Minimum Consumption × Minimum reorder period)
Reorder level: This level is between minimum and maximum levels, such that before the material
ordered is received into stores, there is sufficient quantity on hand to cover with normal and
abnormal consumption situations. It is the level at what order for replenishment of stock should
be placed.
The formula used for its calculation is as follows:
Reorder level = Maximum reorder period × Maximum Usage (or)
= Minimum level + (Avg. rate of consumption × Avg. time
to obtain fresh supplies)
Now Avg. inventory level = Maximum level + ½ Reorder quantity

OR =

Did u know? What is Danger Level?
It is the level at which normal issues of raw material inventory are stopped and emergency
issues are only made.
Danger Level = Avg. Consumption × Lead time for emergency Purchases

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