Minimum
Re-order Level:
This is the balance of stock at which a new order for stock is placed. This
re-order level is expressed mathematically as;
Re-order Level:
This is the balance of stock at which a new order for stock is placed. This
re-order level is expressed mathematically as;
Maximum usage (consume) x Maximum
lead time
lead time
Re-order
Quantity:
This is the quantity that is been ordered or placed on order. It is expressed
mathematically as;
Quantity:
This is the quantity that is been ordered or placed on order. It is expressed
mathematically as;
Maximum stock level – Re-order level
+ (Minimum usage x Minimum lead time)
+ (Minimum usage x Minimum lead time)
Maximum
Stock Level: This
is the highest stock level authorised and maintain by management. It is
expressed as;
Stock Level: This
is the highest stock level authorised and maintain by management. It is
expressed as;
Re-order level + EOQ – (Minimum
usage x minimum lead time)
usage x minimum lead time)
Average
Cost: This
is the stock level which is determined by;
Cost: This
is the stock level which is determined by;
Maximum stock level + minimum stock
level ÷ 2
level ÷ 2
Stock
Turnover Ratio: This
ratio inform management about the rate at which stock is used. It is expressed
mathematically as;
Turnover Ratio: This
ratio inform management about the rate at which stock is used. It is expressed
mathematically as;
Lead
Time:
This refers to the time interval between ordering for stock and actual receipts
of stock.
Time:
This refers to the time interval between ordering for stock and actual receipts
of stock.
Minimum
Stock Level: This
is the point at which the stock level is at the minimum. It is represented as
Stock Level: This
is the point at which the stock level is at the minimum. It is represented as
Re-order level – (Average usage x
average lead time)
average lead time)
Example
Asaba Manufacturing Company Plc
produces a product X, the following information relate to material which the
company uses in its production activities;
produces a product X, the following information relate to material which the
company uses in its production activities;
Lead time, maximum = 10 months
Lead time, minimum = 5 months
Material use annually = 1,800kg
Ordering cost N5 per order
Storage cost N2 per item
Price per unit/per kg or material N3
Usage of material: Maximum usage,
800kg per month
800kg per month
Minimum
usage, 300kg per month
usage, 300kg per month
Average
usage 550 per month
usage 550 per month
Total acquisition cost of material
consume annually isN54,000
consume annually is
Required
1.) EOQ
2.) Re-order
level
level
3.) Maximum
stock level
stock level
4.) Minimum
stock level
stock level
5.) Re-order
quantity
quantity
6.) Average
stock level
stock level
7.) Stock
turnover level
turnover level
Solution
1.) EOQ
(Economic Order Quantity)
(Economic Order Quantity)
Where;
O = Ordering cost
D = Annual demand
C = Carrying cost
2 = Constant
2.) Re-order level =
Maximum usage x Minimum lead time
Maximum usage x Minimum lead time
= 800 x 10 = 8000 units
3.) Maximum Stock level =
ROL + EOQ – Min Usage x min lead time
ROL + EOQ – Min Usage x min lead time
= 8000 + 95 – (300 x 5)
= 8000 + 95 – 1500
= 8095 – 1500 = 6595
units
units
4.) Minimum
Stock Level = ROL – (Avg usage x Avg lead time)
Stock Level = ROL – (Avg usage x Avg lead time)
