# Maximum Stock Level Written by True Tamplin, BSc, CEPF®
Updated on August 19, 2021

## Maximum Stock Level: Definition and Explanation

A maximum stock level is the upper limit of stock that should not be exceeded under normal circumstances without the prior agreement of the management.

The aim of setting a maximum stock level is to avoid undue investment of capital leading to loss of interest, obsolescence of materials, and additional overheads in the form of higher rents.

## Main Factors Involved in Fixing the Maximum Stock Level

The main factors to consider when fixing the maximum stock level are:

• Average rate of consumption of materials
• Time needed to obtain new supplies
• Amount of obsolescence available
• Availability of storage space
• Economic order quantity
• Cost of carrying inventory or cost of storage
• Risk of deterioration in quality and obsolescence of materials
• Seasonal considerations in terms of price and availability of materials
• Incidence of insurance costs, which may be important for costly materials
• Inherent risks associated with materials and any restrictions imposed by the government in this regard

### Formula for Maximum Stock Level

The maximum stock level can be calculated by applying the following formula:

Maximum stock level = Reorder level + Reorder quantity – (Minimum consumption per day/per week etc. x Minimum time required for delivery)

Another formula for the maximum stock level is given as follows:

Maximum stock level = Reorder level – Consumption during the time required to get supplies at minimum rate + Economic order size

### Example

ZEE is a product manufactured from three raw materials: M, N, and Q. Each unit of ZEE requires 10 kg, 8 kg, and 6 kg of M, N, and Q respectively.

The reorder levels of M and N are 15,000 kg and 10,000 kg, respectively. The minimum reorder level of Q is 25,000 kg. The weekly production of ZEE varies from 300 to 500 units, while the weekly average production is 400 units.

Required: Calculate the following:

1. Minimum stock level of M
2. Maximum stock level of N
3. Reorder level of Q

The following additional data are given:

 M N Q Reorder Quantity (kg) 20,000 15,000 20,000 Delivery (weeks): Minimum 2 4 3 Average 3 5 4 Maximum 4 6 5

### Solution

1. Minimum Stock Level of M

= Reorder level – (Normal consumption per week x Average time required to obtain supplies)
= 15,000 kgs. – (400 units x 10 kgs. x 3 weeks)
= 15,000 – 12,000
= 3,000 kgs.

2. Maximum Stock Level of N

= Reorder level + Reorder quantity – (Minimum consumption per week x Minimum time required to obtain supplies)
= 10,000 kg + 15,000 kg – (300 units x 8 kg x 4 weeks)
= 25,000 kg – 9,600 kg
= 15,400 kg

3. Reorder level of Q

= Maximum consumption per week x Maximum time required to obtain supplies
= 500 units x 6 kg x 5 weeks
= 15,000 kg

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