In inventory management, maximum stock level plays a vital role for planning and decision making. Without knowing the maximum quantity of any raw material, an entity cannot plan out its production effectively and efficiently. There are numerous Advantages of maximum stock level, some of them are:
- it helps the entity in better allocation of store location for raw material items, without knowking maximum level of raw material, continuous orders can lead to space shortage in the store department. So, factory has to buy further space or rent a space.
- it helps the entity in establishing improved working capital cycle, by knowling the maximum level, entity can save precious money that could be wasted if maximum point is not set and orders are placed continuously,
- it helps the organization in reducing its obligation to a tremendous level, placing orders only when specific raw material falls below the maximum point. So, liability will only arise when orders are delivered. If there is a credit period allowed, then better utilization of credit period can also improve working capital of the entity.
- it helps the store incharge in alerting the purchaser to stop purchasing specific raw material when the stock reaches to the set maximum level, if this level is not set, store keeper will generate purchase requisition on his own decision.
- it helps the entity in reducing the holding cost of inventory, if maximum inventory level is not set, a lot of inventory will pile up in the factory premises and the management will have to pour extra money to rent a space or purchase a new store location to save these raw materials.