COMMERCE STUDY NOTES, FORM TWO TOPIC 5-6.

TOPIC 5: Ware-Housing Management
Ware-Housing Management
Meaning of the Terms Ware-housing and Ware-house
Define the terms ware-housing and ware-house
Warehousing is the institutional arrangement for the storage of goods i.e. receiving, storing and dispatching the goods to the uses. It is a very important aids to trade and through it trade can be operated efficiently.
A warehouse is a commercial building for storage of goods. Warehouses are used by manufacturers, importers, exporters, wholesalers, transport businesses, customs, etc. They are usually large plain buildings in industrial areas of cities, towns and villages. A warehouse is an establishment for the storage or accumulation of goods. The people who require goods may be secondary producers, distributors or ultimate consumers.
They usually have loading docks to load and unload goods from trucks. Sometimes warehouses are designed for the loading and unloading of goods directly from railways, airports, or seaports. They often have cranes and forklifts for moving goods, which are usually placed on ISO standard pallets loaded into pallet racks. Stored goods can include any raw materials, packing materials, spare parts, components, or finished goods associated with agriculture, manufacturing and production. In Indian English a warehouse may be referred to as a go down.
The global warehousing concept has gained popularity over the last decade as stock pre-positioning becomes one of the strategies for ensuring a timely response to emergencies. They are usually purpose built or purpose designed facilities operated by permanent staff that has been trained in all the skills necessary to run an efficient facility or utilising third party logistics (3PL) staff and facilities. For such operations, organisations use, information systems that are computer based, with sophisticated software to help in the planning and management of the warehouse. The operating situation is relatively stable and management attention is focused on the efficient and cost effective running of the warehouse operation. Numerous organizations have centralized pre-positioning units strategically located globally. Some of these offer extended services to other humanitarian organizations on a cost plus operating charges basis.
The Need for Warehousing
Show the need for warehousing
Advantages of warehouse are;
Is storage an issue for your business? Many companies reach a point where the housing of their products creates an impediment in their forward progress. Are you worried about competing with others in your industry? Would you like to produce more products but are in need of a warehouse?
Many smaller to mid-sized companies do not have the immediate funds to invest in warehousing facilities. What options do they have? They can wait and hope their business eventually makes enough money in order to buy or rent a warehouse. This could take a while and cause anxiety in regards to keeping abreast in the industry.
Another option is to outsource for public warehousing. Outsourcing for business services solves the problem of attempting to remedy situations in-house. Smaller businesses do not have to worry about accumulating the immediate funds; contract warehousing is available to them. Consider the following advantages of outsourcing for storage services.
  • Storage services provide opportunity to expand;A business’ products may be selling well, but the buying cycle could possibly be stymied by lack of room for mass production. Expansion is inhibited and revenue cannot reach full potential due to lack of warehousing. Outsourcing solves this problem.A popular product could be produced in full force and stored in public warehousing. Your supply can now meet the demand of your customers.
  • Warehousing distribution gives you a chance to focus on your business;Businesses need other services. This fact leads the company to make a decision to either build an extension in-house or to outsource for their desired service. Larger companies have the advantage of building in-house more easily; they often have the human resources and the money readily available. It is not so easy for smaller businesses.If smaller companies start to turn their focus to peripheral subjects, they begin to lose focus on their core business matters. Distractions can impede the growth of a smaller business and give their competitors time to surpass them.Outsourcing for warehouse services (as with other services) affords the smaller business time to remain focused on their main objectives.
  • Storage services can save you money on shipping;Public warehousing vendors are located all over the country. It may be easiest to choose a warehouse located around your largest customer base. Many businesses select a contract warehouse in the middle of the country. This saves money on shipping coast to coast and from southern and northern poles of the country.
  • Public warehousing does a lot more than store your goods;Warehouses conduct a variety of tasks. They address ancillary tasks such as picking, packing, shipping etc. You can devote less concern about the particularities of your business. Imagine a warehouse receiving your goods, taking your orders, packing it for shipment, and then shipping it out to the customer! The sundry details of your business will be handled by professionals with experience.
The advantages of warehousing your print products will change the way you look at your future marketing processes.
  1. Cost; The cost benefits of warehousing can be determined by looking at a couple of different factors. The first is what does it cost to warehouse boxes of your printed materials? In some cases you’ll find that a print company will take on your warehousing costs as a value add for printing in bulk or at very low rates per square metre. The second factor, If you have multiple locations globally or across the nation then having central warehousing locations for distribution can save you a lot of money on shipping. You’ll need to consider how many printed pieces you intend to use for different campaigns and which ones can be printed in bulk and warehoused
  2. Environmental Considerations When you run any print job there is large quantity of stock (generally 500+ sheets per run) that is required as make ready. This make ready run is required to set the presses to ensure you print job comes up looking just right and that those colours pop off the page. When you consider printing in bulk there are less make runs required, which saves paper and reduces energy consumption. When you consider a warehousing option by printing in bulk you’re helping the environment.
  3. Inventory Control Having your products warehoused and ready for distribution provides you with the advantages of always having products in stock and ready to distribute out to the market. When you warehouse your print products you can control your inventory and distribute your products when and where you need them. If an unexpected campaign pops up and you have inventory, then you can meet that demand immediately, almost on the day if need be. Alternatively going back to the printing press can really delay your campaign and ultimately the loss of sales opportunities. Having inventory will allow you to control your needs in more streamlined process.
4. Space saving
Depending on the size of your business you simply might not have the space to store your print products. The initial advantage is that when you print in bulk you take advantage of the cost savings achievable. You may also require conditioned space for some printed products, so that over time your products aren’t affected by air and worse humidity. By warehousing your products you take advantage of having your products store with a professional warehousing provide and ready to ship on demand, which saves you the space at your office.
5. Joint Print and Product Opportunities
If you distribute products around the country or even globally then having centrally located warehousing solutions can really help you with your inventory controls, reverse logistics and the time it takes to deliver a product to market. When you warehouse your print products along with the products you sell you take advantage of economies of scale to distribute your products efficiently to the markets you serve.
6. Reverse logistics
If any of your printed products are likely to be returned with the order, then having a warehousing solution can really help you to manage your return orders. When a product needs to be returned you’ll be in a position to have the returned products sent back to your warehouse. This saves you both time and money by centralising your warehousing solutions.
7. Anticipate orders (print materials are always in stock)
When you warehouse your print materials you’ll always have items in stock ready to ship. Either printed materials that are sent directly with your products or print products that are used to continue to market your promotions to your customers. You can then match your projected orders with your stock to best manage your inventory control.
8. Businesses are able to gain the benefits of ordering large print orders
A warehousing solution is a key component in reducing the overall costs for your print materials. Its commonly known that when you print in bulk you reduce the cost per item to print. When you print in bulk you generally need the benefit or a warehousing solution to store your print products. A good print management company can offer you a warehousing and distribution program that will allow you to pocket the savings on printing your orders in bulk.
9. Some warehouse solutions providers can help you with packaging, labeling and shipping
A growing trend in the warehousing solutions market is to provide distribution services which includes packaging, labelling and the shipping of your products. When you consider warehousing your products ask if your warehousing partner offers distribution services as well. You may be able to centralise your warehousing solutions so that you can send products out on demand cost effectively to meet your customers needs.
10. Extended storing for long lead items
  • Some products have longer lead times than others and may need to sit on the shelf for an extended period of time before they go out to market. Have a warehousing partner can allow you to cost effectively manage and store your products over extended periods of time, so when your marketing campaigns kick in your products will be waiting and ready to deliver.
  • Have you considered warehousing your print and packaging requirements? Let us know how we can help you evaluate a warehousing and distribution service.
FUCTIONS OF MODERN WAREHOUSING
  1. Storage: This is the basic function of warehousing. Surplus commodities which are not needed immediately can be stored in warehouses. They can be supplied as and when needed by the customers.
  2. Price Stabilization: Warehouses play an important role in the process of price stabilization. It is achieved by the creation of time utility by warehousing. Fall in the prices of goods when their supply is in abundance and rise in their prices during the slack season are avoided.
  3. Risk bearing: When the goods are stored in warehouses they are exposed to many risks in the form of theft, deterioration, exploration, fire etc. Warehouses are constructed in such a way as to minimise these risks. Contract of bailment operates when the goods are stored in wave-houses. The person keeping the goods in warehouses acts as boiler and warehouse keeper acts as boiler. A warehouse keeper has to take the reasonable care of the goods and safeguard them against various risks. For any loss or damage sustained by goods, warehouse keeper shall be liable to the owner of the goods.
  4. Financing: Loans can be raised from the warehouse keeper against the goods stored by the owner. Goods act as security for the warehouse keeper. Similarly, banks and other financial institutions also advance loans against warehouse receipts. In this manner, warehousing acts as a source of finance for the businessmen for meeting business operations.
  5. Grading and Packing: Warehouses nowadays provide the facilities of packing, processing and grading of goods. Goods can be packed in convenient sizes as per the instructions of the owner.
Difference between the Various Types of Warehouses
Distinguish the various types of warehouses
Types of Warehouses
Private Warehouse
This type of warehouse is owned and operated by channel suppliers and resellers and used in their own distribution activity. For instance, a major retail chain may have several regional warehouses supplying their stores or a wholesaler will operate a warehouse at which it receives and distributes products.
The benefits of private warehousing are:
  1. Private warehousing offers better monitoring systems over the handling and storageof products as required by the management from time to time which would enhancethe performance of the warehouse.
  2. There is less likelihood or error in the case of private warehousing since thecompany’s products are handled by its own employees who are able to identify theproducts of their own company.
  3. If there is sufficient volume of goods to be warehoused, the cost of private warehousing comparatively less than that of public warehousing. The cost of private warehousing per unit may be actually higher if the private warehouse is packed to the brim.
  4. Private warehousing is the best choice for some of the locations and the products handled because of the non-availability of the public warehousing.
  5. Private warehousing has the opportunity to specially design its facilities for automatic material handling equipment where as public warehousing may have the same.
  6. Enabling the end user to increase their efficiency by means of better design and structured lay-out.
  7. Efficient use of human resources in warehouse operation improves end users’ overall performance.
  8. Intangible benefits in the form of cost reduction in all the warehouse operations.
The disadvantages of private warehousing include:
  1. Lack of flexibility: The major drawback is it is too costly, because of its fixed size and costs. This means that in the short run, the private facility cannot expand or contract to meet increases or decreases in demand. Thus, when demand is low, the firm still assumed the fixed costs as well as the lower productivity linked to unused warehouse space. However, the disadvantages can be minimized if the firm is able to rent out part of its space. Moreover, it loses flexibility in its strategic location options. They can’t change quickly to rapid changes in market size, location and preferences, and this may mean that they will lose an excellent business opportunity.
  2. High opportunity cost (high risk)ROI on other investments may be greater if funds are channeled into other profit-generating opportunities. Besides, there is also a potential probability of not being able to sell the w/h in the later period due to its customized design.
  3. Low Rate of return: Since the rate of return is about the same as the firm’s other investments, most companies find it advantageous to use a combination of public and private warehousing. It is best to use private warehousing to handle the basic inventory levels required for the least cost logistics in markets where the volume justifies ownership. On the other hand, any extra volume can be stored in the public warehouse during peak periods where private warehouse is full.
  4. High start-up cost:Firms have to generate enough capital to build or buy a warehouse. A warehouse is often a long, risky investment. Moreover, there is cost of hiring and training of employees, and the purchase of material handling equipment. The high cost involved may force the company to seriously consider public warehousing as a better option.
Public Warehouse: These are warehouse which are owned by private individuals or companies or government but they are open to any member of public in return for a storage fee or charge.
The benefits of public warehousing are:
  1. It is in general less expensive and more efficient and effective to achieve more customer service level.
  2. Public warehouses are usually strategically positioned and easily available.
  3. Public warehousing is adequately flexible to meet most space requirements, for several plans are available to suit the requirements of different users
  4. Fixed costs of a warehouse are distributed among many users. Therefore, the overall cost of warehousing per unit works out to a lower figure.
  5. Public warehousing facilities can be given up as soon as necessary without any additional liability on the part of the user.
  6. The costs of public warehousing can be easily and exactly ascertained, and the userpays only for the space and services he uses.
  7. Conservation of capital is more in public warehousing
  8. It has got enough space to handle peak requirements
  9. Public warehousing has reduced risk in their operations.
  10. Public warehousing has got good economies of scale
  11. It would give Tax advantages for end users
  12. Knowledge of exact storage and handling costs are available to end users.
  13. It is insulated from labour disputes
Disadvantages of Public warehouses
  1. Communication problem: There is a potential problem of incompatible computer terminals and systems. They may not have another terminal just to suit the needs of just one customer. Thus, the lack of standardization in contractual agreements makes communication regarding contractual obligations difficult.
  2. Lack of specialized services: Spaces or specialized services needed may not always be available in a specific location. Most public warehouse facilities provide local services which may not be useful for the big MNC who requires more specialized services.
  3. Space may not be available: Public warehousing space may not be available when ans where a firm wants it. Shortage of space can happen in some places especially during peak season, and this may affect the firm adversely
The public warehouse is essentially space that can be leased to solve short-term distribution needs. Retailers that operate their own private warehouses may occasionally seek additional storage space if their facilities have reached capacity or if they are making a special, large purchase of products. For example, retailers may order extra merchandise to prepare for in-store sales or order a large volume of a product that is offered at a low promotional price by a supplier.
Bonded Warehouses:
Bonded warehouses are used for imported goods which are not granted clearance on account of non-payment of custom duty by the importer of these goods. Such warehouses are situated near the ports. Goods can’t be removed from these warehouses until the custom duties are paid.
Bonded warehouses may be run by the government or private agencies (when granted licenses to operate such warehouses). In both the cases there is a strict control and supervision imposed by custom authorities on their operation and functioning.
Importer of the goods has some control over his goods and he can inspect and check the goods as and when he wants. After making part payment of the custom duty, goods can be proportionately withdrawn from these warehouses.
Goods kept in these warehouses can be branded, packed, graded, labeled and canned in the warehouse itself. Bank loans can be raised with the help of receipt issued by these warehouses by giving that receipt as collateral security.
There is a least possibility of goods being exposed to any risk of theft, damage and deterioration. The entrepot trade i.e., re-export of imported goods is greatly facilitated as the importer can have the delivery of goods without paying any custom duty.
Advantages of Bonded warehouses
  • No Duty Payment Required As mentioned, importers and proprietors do not have to pay any type of import duty on products traded or purchased internationally. This can save the importer money and give him or her more control over his finances.
  • Storage is often Long-Term In some countries, storage time is unlimited. In the United States, imported goods may be stored for up to five years. This means that the importer can sit on a product until there is an increase in demand. Because duty is required when the goods are exported or removed from the warehouse for consumption, this also helps the importer manage his or her money, because an increase in demand usually equals an increase in revenue.
  • Save Haven for Restricted Goods If you import goods that are subject to restriction, finding something to do with them before you get the restrictions straightened out can be a hassle. With a bonded warehouse, you can store restricted items until you are able to move them elsewhere or get permission to bring them into the country. Bonded Service has been serving the state or Georgia since 1931. With locations in both Savannah and Atlanta and easy access to one of the biggest airports in the world and one of the busiest ports along the Atlantic Ocean, we can store your imports in our warehouses or transport goods to anywhere in the world.
Disadvantages of bonded warehouses are:
A Customs and Excise Warehouse, commonly known as a Bonded Warehouse, has been located at our premises where customers utilizing the clearing services of the company, are able to store dutiable products without the payment of the customs duty. The maximum storage time allowed is two years. The duty is payable when the goods are required to be withdrawn from storage.
The main disadvantage would be the risk of duty on a certain products being increased while the goods are in the warehouse. <!-- [if !supportLineBreakNewLine]--> <!--[endif]-->
The following conditions apply:
  • The duty rate applicable at the time of withdrawal (UNLESS BEING EXPORTED FROM THE WAREHOUSE) is the rate in force at that time and not the rate that was applicable at the time of warehousing. In other words if the duty is increased by Government during the time the goods are warehoused then the increase will apply. By the same token, if the duty is reduced, the lower rate will apply.
  • Only dutiable goods may be warehoused however both duty and VAT is then deferred while in the warehouse. Goods on which VAT only is payable may not be placed in a Bonded Warehouse.
  • If, while in the warehouse, duty is totally removed by Government from a certain product, then the goods must be removed immediately from the warehouse and the VAT applicable must be paid.
  • All goods must be removed and duty paid after the two year period is expired.
  • No goods may be removed from the bonded warehouse WITHOUT PROPER CLEARANCE AND PAYMENT OF DUTIES AND VAT HAVING TAKEN PLACE.
In some instances, especially with large importers, it may be viable for the importer to establish his own bonded warehouse on his own premises. We provide a service to do this for the importer, if this interests you please visit our consultancy page.
Other type of Warehouses:
These include:
  1. Special Commodity Warehouses.
  2. Cold Storages or Refrigerated Warehouses.
  3. Institutional Warehouses.
  1. Special Commodity Warehouses: These warehouses are constituted for storing a particular type of commodity, e.g., tobacco, cotton, wheat etc. Mature of commodity is important in selecting the type of warehouse. For storing petrol, storage tanks are needed and for storing agricultural products, god downs are needed.
  2. Cold Storage or Refrigerated Warehouses: These are the warehouses which are used for storing perishable commodities like eggs, butter, fruits, vegetables, fish, fresh meat etc. Goods stored in cold storages can be held for longer time. In fact, cold storages have made possible the regular supply of certain commodities throughout the year. For example, fruits and vegetables of all types can be made available to the people throughout the year. Refrigerated warehouses have greatly improved the modern way of life.
  3. Institutional Warehouses: Different institutions and bodies have their own warehouses on account of the nature of their operations. For example, Banks, Railways, Food Corporation of India etc. has their own warehouses for conducting their activities. Banks keep the stock of the parties in these warehouses as security against the loans advanced. Railways maintain warehouses to store large quantity of goods. Goods to be dispatched to different parts of the country are kept in warehouses before they are sent. Similarly, goods received for the purpose of delivery are kept till they are disbursed to the claimant. Various transport agencies also maintain warehouses for storing the goods which are to be dispatched and received. Food Corporation of India has built many big warehouses throughout the country for storing agricultural products.
FACTORS TO CONSIDER IN SELECTION OF SITE FOR WAREHOUSE.
  1. Nature of trade operation: nature of trade and operation can affect for site for warehouse.example, importers and exporters may locate their warehouse near terminals such as airport and so on, and manufacturer may locate their warehouse near their factories and so on.
  2. Location of customers and pattern of demand for the goods: the warehouse must be located near customer for easy distribution of goods. Also if the customers buy in small quantities in order to reduce carriage cost the warehouse must be located near them.
  3. Cost of land: the cost of land on which a warehouse a warehouse is built must be reasonable.
  4. Availability of labour-there is some labourers to work in warehouse. This includes the availability of skilled or trained and non skilled labour.
  5. Enough space for loading and offloading: there must be enough to allow loading and offloading to take place easily which saves times. For example enough space for trucks to deliver goods.Availability of transport facilities: there must be easy access to transport facilities for easy transportation of goods from the warehouse to the customer.
  6. Government policy: decision about the site for a goods warehouse is also affected by the government on utilization of space for business purpose.
Exercise 1
QUIZ
  • Discuss the importance of warehousing in commerce.
  • Discuss various types of warehouses.
TOPIC 6: Stock Administration
Meaning of the Term Administration
Define the term stock administration
Are the overseeing and controlling of the ordering, storage and use of components that a company will use in the production of the items it will sell as well as the overseeing and controlling of quantities of finished products for sale. A business's inventory is one of its major assets and represents an investment that is tied up until the item is sold or used in the production of an item that is sold. It also costs money to store, track and insure inventory. Inventories that are mismanaged can create significant financial problems for a business, whether the mismanagement results in an inventory glut or an inventory shortage.
The Meaning of Receiving; Issuing; Stocktaking; Care of Stock; Placement of Stock Items
Explain what is meant by: Receiving; Issuing; Stocktaking; Care of stock; Placement of stock items
FUNCTIONS OF STOCK ADMINISTRATION
Receiving the stock: the major function of receiving section of the organisation are unloading and packaging. Receiving involves accepting deliveries from carriers, unpacking the deliveries, checking the deliveries on the kind, quantity and quality etc
Placing the goods: the stores convenient for the organisation and the layout should be convenient to the class of goods handled and bins etc should be arranged in logical order.
Basic rules for placing goods in the warehouse
  • Stock must be kept in a way that will clearly show which ones are old stocks and new stocks
  • heavy goods should be kept near the flow
  • goods most frequently required should be easily accessible.
  • valuable or fragile goods should receive special protection.
Care of stock: the shopkeeper should cleaning a warehouse in and outside including the general cleaning of floors, walls, ceiling boards, rooms, container etc, Dusting of various items kept in rooms or stocks. Ensuring that the materials are well preserved, sorting out spoilt goods, for fragile goods and perishable materials needs special handling care.
Issuing of stock: issuing of stocks should be done by the storekeeper and has assistance who have free access to the storeroom. When a department needs materials from the store, stock should be issued against voucher or requisition order signed by the person who authorized to issue. This is purposely done to keep proper records and control the movement of stock i.e. delivery is done against vouchers to ensure that the outflow of stock is equal to inflow of stock.
Inventory Control: refers to the process of checking and keeping records of the quality and value of goods in stock. It includes all activities that are necessary to ensure that the right stock levels are maintained at all time to ensure that overstocking and shortages do not occur. The goal for a business is to invest the least amount in inventory while maintaining specific operating requirements. Ideally, the inventory control in place allows the business to supply needs in regards to production or to the customer at the precise moment needed, at the minimal price. Successful inventory control keeps waste and surplus at a minimum and efficiently handles storage, production and distribution of inventory.
Basic duties of stock control.
  • Assessing the items to be held in stock.
  • Deciding the extent of stock holding of items.
  • Regulating receipts and issues into store houses.
The Meaning and Determination of Turnover; Stock leve
Give the meaning and determination of Turnover; Stock level
Stock Levels Definition:
To overcome the problem of over-stocking or under-stocking it is very essential that pace of consumption should be studied carefully for a number of months and following stock - levels should be fixed by management for all individual items of material except low value items.
  1. Maximum Level. It means maximum quantity which may be held in stock. This level is fixed on basis of various considerations main of which are : rate of consumption, finances and storage space available.
  2. Minimum Level. It means the lowest level below which stocks should not be allowed to fall. It is essentially a buffer stock. This level is fixed by taking into account the rate of consumption and the time necessary to obtain delivery of fresh materials (called lead time).
  3. Danger Level. This is a very critical level which is below minimum level If stock of any particular item reaches this level immediate action to make purchase in a quantity sufficient to tide over the delay in the regular supply, may be necessitated so that production may not stop. In view of the above levels it is necessary that a level of stock should be fixed at which further action for purchases is made for normal procurement. This level is called REORDER LEVEL.
  4. Fixation of Stock Levels. The levels of stocks to be held may be determined by policy decision of the management keeping in view the level of production, finances available, lead time and the storage capacity.
Formula:
Economic order Quantity (EOQ) is generally worked out by using the following formula:- FOQ = 2 C O/I where
  • C = Annual consumption quantity
  • O = Cost of placing one order
  • I = Carrying cost of one unit of materials inventory
Example 1
Example:
One Unit of Material Omega Costs Rs.0.50, yearly consumption is 20,000. Cost of placing one order is Rs.20 and carrying cost of inventory is 20%.
  1. EOQ = 2 x CO/I = 2 x 20,000 x 20/20% of 0.50 = 800,000/ 0.1 = 8.000.000 = 2,828 units approx per order.
  2. Finances required for each order = 2828 x 0.50 = Rs.1414.
  3. Number of orders to be placed in a year = Total annual consumption/EOQ = 20,000/2828 Approximately 7 orders.
What is 'Inventory Turnover'
Inventory turnover is a ratio showing how many times a company's inventory is sold and replaced over a period. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or "inventory turnover days."
Generally it is calculated as:
  • Inventory Turnover = Sales / Inventory
  • However, it may also be calculated as:
  • Inventory Turnover = Cost of Goods Sold / Average Inventor.
FORMULAS
  1. Maximum Level of Stock = (Reorder Level + Reorder Quantity) – (Minimum rate of consumption x Minimum reorder period) Maximum Level may be alternatively fixed as Safety Stock + Reorder Quantity or EOQ.
  2. Minimum level of stock = Reorder level – (Average rate of consumption x Average reorder period)
  3. Safety Stock = (Annual Demand/365) x (Maximum Reorder Period – Average Reorder Period)
  4. Reorder level or Ordering level = Maximum rate of consumption × Maximum reorder period. Alternatively, it will be = safety stock + lead time consumption [lead time consumption will be = (Annual consumption -s- 360) × lead time]
  5. Danger level = It is slightly below the minimum level. It is a level at which special efforts should be made to obtain supplies of materials, i.e. Minimum rate of consumption × Emergency delivery time
  6. Average Stock level = (Maximum stock level + Minimum stock level) x 14 or Minimum Stock level + 14 Reorder Quantity. Obviously, the Reordering level is below the Maximum level, and Minimum level is below the Reordering level and the Danger level is below the Minimum level. Safety Stock is above minimum level.
Important Elements:
In above calculations, the following elements are important:
  1. Consumption Rate: It is consumption or use of material per day (or per week) by production department. These rates will be maximum and minimum, the simple average of maximum and minimum rates is average consumption rate per day or per Week.
  2. Reorder Period: It is period between materials ordered and materials received. The average reorder period is simple average of maximum and minimum reorder periods.
  3. Reorder Quantity: At the time of purchase of material, one of the important problems to be faced is how much quantity of a particular materials to be purchased at a time. If purchases are made frequently in small quantities it will result in loss of trade discounts and economies in purchasing. On the other hand if purchases are made in large quantities it will lead to over stocking and cost of storage will be high. The ordering quantity should be economic and reasonable by all aspects. It should be Economic Order Quantity (EOQ). The calculation of EOQ has been discussed later on.
Example 2
Illustration 1: [Fixation of stock levels]:
Two components A and B are used as follows:
  • Normal usage 50 units per week each
  • Minimum usage 25 units per week each
  • Maximum usage 75 units per week each
  • Reorder Quantity A 300 units; B 500 units
  • Reorder Period A 4 to 6 weeks, B 2 to 4 weeks
Calculate for each component:
  1. Reorder level,
  2. Minimum Level,
  3. Maximum level,
  4. Average Stock Level.
Solution:
  1. Reorder Level = Maximum Rate of Consumption x Maximum Reorder Period. A = 75 x 6 = 450 units B = 75 x 4 = 300 units
  2. Minimum Level = Reorder Level – (Average Rate of consumption x Average Reorder Period) A = 450 – (50 – 5) = 200 units B = 300 – (50 x 3) = 150 units
  3. Maximum Stock Level = (Reorder Level + Reorder Quantity) – (Minimum Consumption Rate x Minimum Reorder Period) A = (450 + 300) – (25 x 4) = 650 units B = (300 + 500) – (25 x 2) = 750 units
  4. Average Stock Level = (Maximum Stock Level + Minimum Stock Level)/2 A = (650 + 200)/2 = 425 units B = (750 + 150)/2 = 450 units
  • Average Stock Level can also be calculated by the formula.
  • Minimum Stock Level + ½ of Reorder Quantity
  • A = 200 + ½ x 300 = 350 units
  • B = 150 + ½ x 500 = 400 units
Example 3
Illustration 2:
If the minimum stock level and average stock level of raw material A are 4,000 and 9000 units respectively, find out its reorder quantity.
Solution:
  • Average stock level = Minimum stock level + ½ of Reorder Quantity
  • 9000 = 4000 + of Reorder Quantity
  • ½ Reorder Quantity = 9000 – 4000 = 5000
  • Reorder Quantity = 10,000 units

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