Minimum Level Or Safety Stock And Its Calculation

Concept And Meaning Of Minimum Stock Level

Minimum level or safety stock level is the level of inventory, below which the stock of materials should not be fall. If the stock goes below minimum level, there is a possibility that the production may be interrupted due to shortage of materials. In other words, the minimum level represents the minimum quantity of the stock that should be held at all times.
The minimum level is determined by using the following formula:
Minimum Level = Re-order level -(Normal consumption x Normal Re-order Point)

Calculation OF Minimum Level Or Safety Stock

Illustration
Re-order Period = 8 to 12 days
Daily consumption = 400 to 600 units
Minimum Level = ?

Solution,
Minimum Level = Re-order Level - (Normal Consumption x Normal Re-order Point)
= 7200 - (500 x 10)
= 2200 units.

Working Notes:
1. Re-order Level = Maximum consumption x Maximum Re-order Point
= 600 x 12 = 7200 units

2. Normal consumption = (Maximum Consumption + Minimum Consumption)/2
= (600+400)/2 = 1000/2= 500 units

3. Normal Re-order Period = (Maximum Re-order Period + Minimum Re-order Period)/2
= (12+8)/2 = 10 days.