Stock levels are maintained in such a way that there is no overstocking , so that chances of loss through damage,deterioration in quality, risk of obsolescence etc. are avoided along with unnecessary blocking of capital or paying a interest on borrowed funds.And also there should not be out of stock situation and ultimately loss of production ,delay in supply of order and subsequently loss of sales and profit.
The production planning and control department or material management department taking care of this store management by fixing maximum,minimum,and ordering level and reorder quantity for stock items .
Reorder level:-This is the levels at which the storekeeper initiates purchase requisition for new order of material.The reorder level takes into account the maximum consumption during the lead time and unexpected delay in receiving the fresh order.
Lead time:- Is the time needs to obtain delivery of material from date of order.In case of delay in the new lots to arrive, stock should not be zero level.Reorder level is calculated as maximum reorder period multiplied by maximum consumption.
Minimum level:-This represents a level which the stock will reach with fresh stock of material provided the fresh delivery is made within the reorder period and material consumption is constant.Stock is normally now allowed to fall below this level.This is also called as buffer stock which can be used in case of emergency.Stock should not be fall below this level suppose stock is fall below this levels is called as Danger level and should take emergency step to replenish the stock other wise stock out situation will be there.
Maximum level:- The stock level above which should not be allowed to rise.The main purpose of this level is to ensure that capital is not blocked up unnecessarily in stores.It can be calculated by reorder level plus reorder quantity minus minimum consumption during reorder period.