Determination of Maximum Stock Level

Determination of maximum stock level

The maximum stock level refers to the highest quantity of goods that should be held in stock to avoid overstocking.

It is determined by the following factors

1. Financial capability of the business — The amount of capital available will determine how much stock can be purchased and held at any time.
2. Storage capacity (space available) — The physical space in the warehouse or store limits how much stock can be safely stored without damage or congestion.
3. Cost of storage — High storage costs (e.g., rent, security, insurance) may limit how much stock a business is willing to hold.
4. Seasonal factors — For seasonal goods like agricultural products, the stock level may be high after harvest to ensure year-round availability.
5. Stability of prices — If prices are expected to rise, a business may buy and store more stock. If prices are unstable, the business may avoid holding too much.
6. Rate of consumption or sales — If goods are sold quickly (fast-moving), then higher stock levels may be maintained. For slow-moving goods, lower maximum levels are preferred.

Average stock level

This is the average number of stock held within a certain period of time (usually a year).

Formula for average stock

$$\text{Average Stock} = \frac{\text{Opening Stock} + \text{Closing Stock}}{2}$$

Example

If a firm has an opening stock valued at Tshs 2500/= and closing stock valued at Tshs 1500/=, calculate the average stock.

$$\text{Average Stock} = \frac{2500 + 1500}{2} = \frac{4000}{2} = 2000 \text{ Tshs}$$

Stock order point (re-order level)

This is the level expressed in units at which a new order should be placed to avoid running out of stock.

Formula for order point

$$\text{Order Point} = (\text{Daily Sales} \times \text{Delivery Time}) + \text{Minimum Stock}$$

Example 1

If a firm has daily sales of 10 units, a delivery time of 20 days, and a minimum stock of 100 units:

$$\text{Order Point} = (10 \times 20) + 100 = 200 + 100 = 300 \text{ units}$$

Example 2

Calculate the order point from the following information:

Daily sales: 20 cartons of soap (each carton contains 10 bars)

Delivery time: 2 weeks

Minimum stock: 500 bars of soap

Convert units

$$20 \text{ cartons} = 20 \times 10 = 200 \text{ bars of soap}$$ $$2 \text{ weeks} = 2 \times 7 = 14 \text{ days}$$

Now calculate

$$\text{Order Point} = (200 \times 14) + 500 = 2800 + 500 = 3300 \text{ bars of soap}$$