A minimum stock level is a threshold value that indicates the level below which actual material stock items should not normally be allowed to fall. In other words, a minimum stock level is a minimum quantity of a particular item of material that must be kept at all times. The fixing of this level acts as a safety measure. For this reason, the minimum stock level is commonly known as safety stock or buffer stock. If the actual stock falls below the minimum stock level, there is a risk of stopping production. Furthermore, management must prioritize the acquisition of fresh supplies. The main objective of fixing the minimum stock level, and thus the minimum level of materials, is to ensure that the required quantity of each item is available at all times. The main factors to consider when fixing the minimum stock level are: The minimum stock level can be calculated by applying the following formula: Suppose we have the following information: Calculate the minimum stock level. Based on this information, the minimum stock level can be calculated as follows: Minimum Stock Level= 2,400 - (300 x 7) = 300 units In a manufacturing operation, a particular material is used as follows: Calculate the minimum stock level. Since we know the above mentioned formula for calculating the minimum stock level, let's start by calculating the reorder level first. Reorder Level = Maximum Consumption per week x Maximum time required to obtain suppliers = 9,000 units x 6 weeks = 54,000 units As the next step, we can calculate minimum stock level as follows: Minimum Stock Level = 54,000 units - (6,000 units x 5 weeks) = 54,000 - 30,000 = 24,000 units Note: The average time required to obtain suppliers was calculated in the following way: = (Minimum period + Maximum Period) / 2 = 4 weeks + 6 weeks / 2 = 5 weeks Minimum Stock Level: Definition and Explanation
Main Factors Involved in Fixing the Minimum Stock Level
Formula for Minimum Stock Level
Examples
Example 1
Solution 1
Example 2
Solution 2
Minimum Stock Level or Minimum Stock Limit FAQs
Minimum stock level = reorder level - (normal consumption x normal delivery Time)
The average rate of consumption of materials, Time needed to procure fresh supplies under top priority conditions, reorder level, production requirements in terms of materials, minimum quantity of materials that can be procured advantageously
In most cases, safety stocks are necessary for companies operating with slow slow-moving. However, it may not be required for fast fast-moving.
It provides a higher level of customer service by ensuring that stocks are replenished before they fall below the minimum levels. It also reduces risk exposure to stoppages in production and sourcing problems.
Disadvantages include high costs associated with maintaining safety stocks and unnecessary storage space requirements for some levels of goods being held in inventory. Additionally, the cost of deteriorating quality of products kept in too large a quantity may exceed potential benefits from using a higher number for safety stock.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
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