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Danger Level and Inventory Formulas

This document defines key inventory management terms like minimum stock level, maximum stock level, danger level, reorder level, normal usage, economic order quantity, and inventory turnover ratio. It provides the formulas to calculate each term, with minimum stock level calculated based on reordering level and consumption rates, maximum stock level calculated similarly but incorporating reordering quantity, and danger level calculated as consumption times the maximum reordering period.

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charan
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98 views2 pages

Danger Level and Inventory Formulas

This document defines key inventory management terms like minimum stock level, maximum stock level, danger level, reorder level, normal usage, economic order quantity, and inventory turnover ratio. It provides the formulas to calculate each term, with minimum stock level calculated based on reordering level and consumption rates, maximum stock level calculated similarly but incorporating reordering quantity, and danger level calculated as consumption times the maximum reordering period.

Uploaded by

charan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Minimum Stock Level:

Minimum Stock Level = Re-ordering Level – (Normal Consumption x Normal Re-order Period)

Maximum Stock Level:


Maximum Stock Level = Reordering Level + Re-ordering Quantity - (Minimum Consumption x
Minimum Re-ordering Period)

Danger Level:

Danger Level = Average consumption (or) Normal Consumption X Maximum Reorder Period
for Emergency Purchases

Average Stock Level

Minimum Stock Level+Maximum Stock Level


Average Stock Level = 2

Reorder Level:
Reorder Level =Maximum Consumption X Maximum Reorder Period

Normal Usage:
Total Consumption per year
Normal Usage= 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑀𝑜𝑛𝑡ℎ𝑠 𝑖𝑛 𝑎 𝑌𝑒𝑎𝑟

EOQ (Economic Order Quantity):

2𝐴𝑂
𝐸𝑂𝑄 = √
𝐶

Where
A= Annual Usage
O= Ordering Cost
C= Carrying Cost or Storage Cost
Inventory Turnover Ratio:
Inventory Turnover Ratio = Cost of Material Consumed / Average Inventory
Average Inventory= (Opening Stock + Closing Stock)/2

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