What is Maximum Stock Level?

The maximum stock level is a not-to-exceed amount used for inventory planning. This stock level is based on a calculation of the cost of storage, standard order quantities, and the risk of inventory becoming obsolete or spoiling with the passage of time. Another issue may be a strict limitation on storage space, as may be the case for refrigerated or frozen goods.

The maximum stock level tends to be quite high for low-volume, low-cost items that are unlikely to become obsolete, such as fittings and fasteners. Conversely, the maximum stock level tends to be quite low for high-volume or high-cost items, and especially those with short shelf lives. Thus, the maximum stocking level might only be enough for a few days or weeks for fashion clothes (short shelf life), computer chips (high cost), and refrigerators (high volume).

Example of Maximum Stock Level

As an example of how the maximum stock level concept can be used, an online retailer sells laptop chargers, and its owner needs to set a maximum stock level. He decides to set it at 100 units, because the historical sales data show that the maximum anticipated demand within a restocking cycle is 80 units, with an allowance for a buffer of 20 units in case of unexpected spikes in demand. Setting this maximum ensures that the store does not tie up excessive capital or storage space while still meeting customer needs efficiently.

Advantage of Having a Maximum Stock Level

The reason for having a maximum stock level is to eliminate any excess investments in inventory. By doing so, you can eliminate the related interest expense for the funds that are no longer needed, while also minimizing the risk of loss due to obsolete inventory. A further advantage is that you can reduce the amount of warehouse space needed to store inventory, which reduces the overhead costs associated with renting and maintaining the extra warehouse space.