Page 277 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes
Example: Two components, A and B, are used as follows:
Normal usage 100 units/week

Maximum usage 150 units/week
Minimum usage 50 units/week
Reorder quantity A 600, B 1000
Reorder period A 4 to 6 weeks

B 2 to 4 weeks
Calculate for cash component (i) Reorder level
(ii) Minimum level
(iii) Maximum level

(iv) Average Stock level
Solution:
1. Reorder level = Maximum usage/week × Maximum delivery period
Reorder level for A = 150 units × 6 = 900 units

Reorder level for B = 150 units × 4 = 600 units
2. Minimum level = Reorder level – (Normal usage × Avg. period)

Minimum level for A = 900 units – 50 units ×

= 900 units – 250 units = 650 units


Minimum level for B = 600 units – 50 units × = 450 units

3. Maximum level = Reorder level + Reorder Qty – (Min. consumption × Min. reorder
period)
Maximum level for A = (900+600) – (50 units × 4 weeks)

= 1500 – 200 = 1300 units
Maximum level for B = (600+1000) – (50units × 2) = 1500 units
4. Average stock level = ½ (minimum + maximum stock level) Average stock for
component A = ½ (650 + 1300) = 975
Average stock for component
B = ½ (450 + 1500) = 975

12.3.2 ABC Analysis (called Always Better Control)

It is a system of inventory control where discriminating control is exercised over different items
of stores classified on the basis of investment involved. Usually, the items are divided into three
categories according to their importance, namely their value and frequency of replenishment
during a period.

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