Stock Control:

Definition and Explanation:

The materials purchased by a concern may be classified as stock items which are taken into store and held until required, or as direct deliveries to the point of consumption. The control of those materials which are stock items is known as stock control.
The function of stock control is to obtain the maximum stock turnover consistent with the maintenance of sufficient stocks to meet all requirements. Stock turnover is the ratio which the cost of the materials used per annum bears to the average stock of raw materials. Discussions with regard to the quantity of materials stocked are reached after may consideration such as:

• The availability of capital for the provisions of stocks
• The storage space available
• The cost of storage
• Risk of loss due to fall in prices, deterioration, obsolescence, theft etc.
• Economic order quantities
• Delivery delays

For effective control of materials, it is important to decide upon different levels of materials. These levels are maximum limit or level, minimum limit or level and re-order level or ordering point or ordering level. Maximum, minimum and re-order levels are not static. They must be varied to suit the changing circumstances. Thus, alteration will take place if the usage of certain materials is increased or decreased. If the re-order period changes, or if, in the light of a review of capital available, it is decided that the overall inventory must be increased or decreased.

Re-order Level or Ordering Point or Ordering Level:

Definition and explanation:

This is that level of materials at which a new order for supply of materials is to be placed. In other words, at this level a purchase requisition is made out. This level is fixed somewhere between maximum and minimum levels. Order points are based on usage during time necessary to requisition order, and receive materials, plus an allowance for protection against stock out.
The order point is reached when inventory on hand and quantities due in are equal to the lead time usage quantity plus the safety  stock quantity.

Formula of Re-order Level or Ordering Point:

The following two formulas are used for the calculation of reorder level or point.

[ Ordering point or re-order level = Maximum daily or weekly or monthly usage × Lead time ]

The above formula is used when usage and lead time are known with certainty; therefore, no safety stock is provided. When safety stock is provided then the following formula will be applicable:

[ Ordering point or re-order level = Maximum daily or weekly or monthly usage × Lead time + Safety stock ]

Examples:

Example 1:

Minimum daily requirement	800 units
Time required to receive emergency supplies	4 days
Average daily requirement	700 units
Minimum daily requirement	600 units
Time required for refresh supplies	One month (30 days)
Calculate ordering point or re-order level Calculation: Ordering point = Ordering point or re-order level = Maximum daily or weekly or monthly usage ×  Lead time = 800 × 30 = 24,000 units

Example 2:

Tow types of materials are used as follows:Minimum usage	20 units per week each
Maximum usage	40 units per week each
Normal usage	60 units per week each
Re-order period or Lead time Material A: Material B	3 to 5 weeks 2 to 4 weeks
Calculate re order point for two types of materials Calculation: Ordering point or re-order level = Maximum daily or weekly or monthly usage ×  Maximum re-order period
A: 60 × 5 = 300 units
B: 60 × 4 = 240 units