In this method the minimum and maximum level for all items of inventory are fixed. These levels function as an origin for initiating action so that the quantity of all items is controlled. These types of levels are not permanent and probable to change along with the level of activity. The maximum level specifies the maximum quantity of an item of inventory that can be held at a point of time. The maximum level of inventory would base upon the subsequent factor:
- Availability of storage space
- lead time (time needed in receiving the goods ordered)
- Availability of working capital
- Average rate of consumption of material
- cost of storage and insurance
- Risk of obsolescence and deterioration
- Quantity discounts
Minimum level signifies the quantitative balance of an item of inventory, that must be kept in hand at all times. This is a level below that the inventories must not fall. This level of inventory is held to ignore stock out and consequent stoppage of production. The minimum level would basically depend upon:
- Rate of consumption of material
- The maximum and minimum time needed to get fresh supplies
- The re-order level.