The document defines key terms related to maintaining optimal inventory levels, including minimum level, maximum level, reorder level, and danger level. It then provides examples of calculating reorder levels and minimum inventory levels given data on average and maximum demand and consumption over different time periods, as well as average and maximum lead times. The document emphasizes calculating reorder levels based on maximum demand and lead time to ensure sufficient inventory is maintained to avoid stockouts.

1. Stock levels
Module 2: Chapter – Materials

2. Terms:
Minimum level and Safety stock level: Minimum quantity of the
material which must be maintained in hand at all time
Maximum level: Stock should not exceed this quantity
Maximum reorder period: Maximum period taken to get the
material once it is initiated
Danger level: Only issues under specific instructions are made.
Officer will make special arrangements to avoid production
stoppage
Reorder period/ Lead time / delivery period : The time required
to obtain new materials

3. 1. Maximum Level:
Reorder level + Reorder quantity – (Minimum consumption X Minimum
reorder period)
2. Minimum Level:
Reorder level – ( Normal Consumption X Normal reorder period)
Average consumption of material Average reorder period
Minimum reorder period + Maximum reorder period
2
3. Average Stock Level:
Minimum stock level + ½ of reorder quantity

4. 4. Reorder Level:
(Maximum consumption X Maximum reorder period ) + Safety Stock
OR
Minimum level + ( Average consumption X Average reorder period)
OR
Minimum level + Consumption during lead time
5. Danger Level:
Average consumption X Maximum reorder period for emergency
purchases
OR
Minimum consumption X Minimum reorder period

6. Reorder Level of stock
Reorder level of stock (also known as reorder point or ordering point) in a
business is a preset level of stock or inventory at which the business places a
new order with its suppliers to obtain the delivery of raw materials or finished
goods inventory.
Problem 2
The David IT Store sells 500 laptops on an average in a week. The maximum demand
in a week is 523 laptops. If, the lead time is 4.5 week then the reorder level would be:
Reorder level = Maximum weekly usage × Lead time in weeks
= 523 units × 4.5 weeks
= 2,354 units
It means that every time the number of laptops decreases to 2,354, the David IT Store
must place a new order.

7. Problem 3
A business manufactures tires. The average demand for the business is 645 tires/week
and the maximum demand is 670 tires/week. To manufacture one tire 3 kilos of
rubber is required as raw material. So, the production department of the business
requires a maximum of 2,010 (= 670 × 3) kilos of rubber per week. If the lead time to
get rubber from the supplier is 1.5 weeks then re-order level would be:
Reorder level = Maximum demand per week × Lead time in weeks
= 2,010 kilos × 1.5 weeks
= 3,015 kilos
The production department must place a new order when the raw material (rubber)
reaches 3,015 kilos.

8. Minimum level of stock
The minimum level of stock is a certain predetermined minimum quantity
of raw materials or merchandise inventory which should always be
available in stock in the normal course of business.
 a precautionary level of inventory which indicates that the delivery of
raw materials or merchandise may take more than the normal lead time*.
*Lead time is the expected time taken by the supplier to deliver goods at
the warehouse or at the point of consumption.
If the level of stock strikes the minimum level, the management of the
company must make sure that they corroborate with the supplier and take
other necessary measures to make the goods (inventory or raw materials)
available in time so that the business operations are not disturbed or
delayed.

9. Problem 4
The Noor Clothing House sells T-shirts. Each shirt costs Rs.15 and is sold for Rs.20
to customers. The maximum demand is 20,000 shirts per year and the average
demand is 18,570 shirts per year. The average lead time is 57 days and the maximum
lead time is 64 days.
Required: Compute the reorder level and the minimum level of stock of T-shirts for
Noor Clothing House.
Solution
•Maximum demand per day: 20,000 shirts/365 days = 55 shirts
•Average demand per day: 18,570 shirts/365 days = 51 shirts
Reorder level = (Maximum demand × Maximum lead time)
= (55 units × 64 days)
= 3,520 units
Minimum level of stock = Reorder level – (Average demand × average lead time)
= 3,520 units – (51 units × 57 days)
= 3,520 units – 2,907 units
= 613 units

10. Problem 5
The Maham Autos deals in cars. The selected data is given
below:
Annual demand:
Maximum demand: 730 cars per year
Normal or average demand: 365 cars per year
Minimum demand: 283 cars per year
Lead time in days:
Maximum lead time: 98 days
Normal or average lead time: 87 days
Minimum lead time: 73 days
Required: Compute minimum level of inventory for Maham
Autos on the basis of above data.
Solution:
Maximum demand per day: 730 cars/365 days
= 2 cars per day
Average demand per day: 365 cars/365 days =
1 car per day
Minimum level of inventory = (Maximum
demand per day × Maximum lead time) –
(Average demand per day × Average lead
time)
= (2 units × 98 days) – (1 unit × 87 days)
= 196 units – 87 units
= 109 units

11. Problem 6
A company makes iron tables. To manufacture
one table, 2.35 kgs of iron (raw material) is
used. The details are given below:
Maximum demand for tables: 600 tables per
month
Average demand for tables: 475 tables per
month
Minimum demand for tables: 320 tables per
month
Maximum lead time: 2.5 weeks
Average lead time: 1.9 weeks
Minimum lead time: 1.5 weeks
Required: Compute the minimum kilograms of
iron that the company needs to maintain.
Solution:
Maximum Usage: 600 tables × 2.35 kgs = 1,410
kgs
Average Usage: 475 tables × 2.35 kgs = 1,116.25
kgs
Minimum level = (Maximum usage × Maximum
lead time) – (Average usage × Average lead time)
= (1,410 kgs × 2.5 days) – (1,116.25 kgs × 1.9
days)
= 3,525 kgs – 2,121 kgs
= 1,404 kgs

12. Problem 7
Calculate minimum stock level,
maximum stock level and reorder level
from the following information:
Minimum
consumption
100 units per day
Maximum
consumption
150 units per day
Normal
consumption
120 units per day
Re-order period 10 – 15 days
Re-order quantity 1500 units
Normal re-order
period
12 days
Reorder level
= Maximum consumption X Maximum
reorder period
= 150 units X 15 Days = 2250 Units
Minimum stock level
= Reorder level – ( Normal Consumption
X Normal reorder period)
= 2250 – ( 120X 12) = 810 Units
Maximum stock level
= Reorder level + Reorder quantity –
(Minimum consumption X Minimum
reorder period)
= 2250 + 1500 – ( 100 X 10) = 2270 Units

13. Problem 8
A company exports juicers in a neighboring country. The average annual
demand in the market is 180,000 juicers. The average lead time of the
supplier is 1.5 months. The lead time for emergency supplies is 20 days.
(Use 365 days in a year).
Required: Determine the danger level of stock.
Solution
Danger level of stock = Average daily demand × Lead time for emergency
supplies
= *493 units × 20 days
= 9860 units
*Average daily demand: 180,000/365 = 493 units

14. Problem 9
A company manufactures shirts. Each shirt
is prepared by using 1.25 meters of cloth.
The details about demand and lead time are
given below:
Average demand for shirts per day: 250
units
Maximum demand for shirts per day: 300
units
Minimum demand for shirts per day: 200
units
Average lead time: 30 days
Lead time for emergency supplies: 7 days
Danger level of stock of cloth: ?
Solution:
Danger level = Average daily
usage × Lead time for
emergency situations
= *312.5 Meters × 7 Days
= 2,187.5 meters
*The average daily usage of
cloths: 250 units × 1.25 meters
= 312.5 meters