Define a.) Fixation of inventory levels b.) Maximum level

Explain the following terms related to inventory levels

a. Fixation of inventory levels : Fixation of inventory levels facilitates easy maintenance and control of various materials in a proper way. However, following points should be remembered: Only fixation of inventory levels does not facilitate inventory control. A constant watch on the actual stock level of materials should be kept so that proper action can be taken in time The levels which are fixed are not for permanent basis and are subject to regular revision.

b. Maximum level : This is the top level which indicates that level of material stock should not exceed this level. If it does, it may involve blocking of funds in inventory which may be used for some other useful purposes. This level is fixed after considering following factors:

- Maximum Usage
- Lead Time
- Storage facilities available
- Prices of material
- Other various costs involved like insurance, storage cost etc.
- Availability of funds for procurement of materials
- Nature of material
- EOQ

c. Minimum level: This level is fixed below the re-order level but above the danger level. The level of stock should not be reduced below this level. If it does, then it involves the risk of non availability of material whenever required. This level is fixed after considering two factors: Rate of Consumption and Lead Time.

d. Re-order level: This level is fixed between maximum and minimum level in such a way that the requirement of materials for the production can be met properly till the fresh supply of material is received. This level of material stock indicates that steps should be taken for procurement of further lots of material.

e. Danger level: This level is fixed below minimum level. If the stock reaches this level an immediate action must be taken by the company in respect of getting supply. This level indicates a panic situation for the company as it has to make purchases in a rush which may involve higher costs.