Page 244 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes Danger Level = Avg. Consumption × Lead time for emergency
Purchases

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:
1. Reorder level
2. Minimum level
3. Maximum level

4. 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)
(4 6)
+
Minimum level for A = 900 units – 50 units ×
2
= 900 units – 250 units = 650 units
+
(2 4)
Minimum level for B = 600 units – 50 units × = 450 units
2
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
11.3.2 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

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