c) Minimum Level or Safety Stock level The minimum level is the minimum quantity of the material which must be maintained in hand at all times. The quantity is fixed so that the production is not held up due to shortage of the materials. In fixing this level, the following factors should be considered: 1. Lead time i.e. time lag between indenting and receiving of the material. It is the time required to replenish the supply. 2. Rate of consumption of the material during the lead time. 3. Nature of the material. Minimum level is not required in case of a special material which is required against customer's specific order. Formula for calculating minimum level or safety stock level given by Wheldon is as follows: Minimum Stock Level = Re-ordering level - (Normal consumption x Normal Re-order period) d) Maximum Level It is the maximum of stock which should be held in stock at any time during the year. The quantity is fixed so as to avoid overstocking as it leads to the following disadvantages. 1. Overstocking leads to increase in working capital requirement which could be profitable used somewhere else. 2. Overstocking will need more godown space, so more rent will have to be paid. 3. It may also lead to obsolescence on account of overstocking. 4. There are chances that the quality of materials will deteriorate because large stock will require more time before they are consumed. 5. There may be fear of depreciation in market values of the overstocked materials. According to Wheldon. Maximum Stock level = Reordering level + Re-ordering Quantity - (Minimum consumption x Minimum re-ordering period) e) Danger Level This level means that level of stock at which normal issues of the material are stopped and issues are made only under specific instructions. The purchase officer will make special arrangements to get the materials which reach at their danger levels so that the production may not stop due to shortage of materials. Danger Level = Average consumption x Max.re-order period for emergency purchases. 1) Average Stock Level The average stock level is calculated by the following formula: Average Stock Level = Minimum Stock Level + 2 of Re-order Quantity. Or 12 (Minimum Stock Level + Maximum Stock Level) ...: Calculate the minimum stock level, maximum stock level, re-ordering level and average stock level from the following information: (i) Minimum consumption = 100 units per day (ii) Maximum consumption = 150 units per day (iii) Normal consumption = 120 units per day (iv) Re-order period = 10-15 days (v) Re-order quantity = 1,500 units (vi) Normal re-order period = 12 days $ 47