2 bin inventory reorder system

2 bin inventory system is a simple inventory management system. The management simple use two place for stock stores and use one of them when one stock warehouse is empty then it order the inventory and start using the second warehouse. when the second bin is empty then first bin was filled by fresh supply and this process continues.

Reorder level and Maximum level of stock

Reorder level and maximum level of stock are two different concept .The reorder level is the level where you place an order for the stock whereas the maximum level the maximum holding of the stock efficiently and any quantity above that level would cause inefficiency. The stock involve huge cost therefore it is necessary to determine the maximum efficient level.

There is a scientific formula to calculate the minimum level which is given below


Maximum Level = Re order level ( Minimum Usage * Minimum Lead time) + Reorder Quantity

Reorder Quantity and Reorder Level

reorder quantity is the management decision is to how much stock is to be order to minimize the cost. This is important to remember that mainly two cost are considered in deciding the the reorder quantity and these cost are holding cost and ordering cost. This is matter of fact that purchase cost remains the same and have no relationship with quantity ordered. The most common method of calculating the reorder quantity is EOQ.


Reorder level is total a different concept than reorder quantity and tell basically about that at what stage the order would be place to avoid stock out or shortage of stock. The reorder level is important concept because the shortage of stock has many disadvantages for the entity these advantages include the idle time of the labour , loss of revenue , damage to the entity image and loss of revenue.


There are two important concept for determining the reorder level one is the usage and the second is the lead time. The usage is the expected quantity which would be required for a production process . The second factor is lead time which is the time require to reach the stock at the warehouse.

The management has to define the maximum usage and maximum lead time and also minimum usage and minimum lead time. There can be three reorder level calculated one is the that there will be maximum usage and maximum lead time. The second level is the minimum usage and minimum stock level and third is average usage and average lead time.

Stock Shortage Costs

Stock shortage costs are not a financial cost but and can not be directly explained in terms of money but it is these cost related to reputation and smooth operations of the entity.

Production Stoppage

The stock shortage will result in stoppage of production process which is not a healthy thing for an organization. The stoppage off course is the wastage of many resources.

Order completion 

The shortage may result in delay the order completion which will bring a bad reputation to the organization.

Loss of Revenue

The stock shortage will impact the production process and the entity would not be able to meet the demands of customers and this will result in loss of revenue.

Stock related costs

Stock Related Costs

There are three main types of costs are related to stocks i.e ordering cost , purchase cost and holding cost . As stock involve a number of cost therefore a proper control must be in place to control and minimize those cost.

There are different methods and formula are available to minimize the cost. Those method primarily focus the ordering and holding cost of the stock.

1.Ordering cost

These cost include the telecommunication cost involved in ordering , cost of ordering team , cost of goods confirmation team and processes.Ordering cost and quantity order has inverse relationship. The unit ordering cost  decreases with the increase of quantity ordered.

2.Purchase Cost

The purchase cost include the purchase invoice , transportation cost and goods handling cost.

3.Holding Cost

 Holding cost includes the warehouse rent cost ,insurance cost and deterioration of cost. The holding cost has a direct relationship with ordered quantity. The holding cost increase with the increase of quantity ordered.

Types of Inventory Re Order Systems

Types of Inventory Re Order Systems

The following are important type of inventory re- oder system

1. Periodical Review of inventory
2. Just in time system commonly know as JIT
3. Perpetual inventory re order method
4. Martial requirement planning

Periodical Review system :- The management fixed a level of inventory and that level is periodically review i.e ( weekly , monthly or quarterly ). The management re order the quantity to maintain that minimum level. This method is very simple . 

Just in time Method : The management order as required. This concept was introduced basically to control the holding cost of inventory . The holding inventory not only involves high cost but also involve high risk of damage by fire etc. 

This method reduces the holding cost of inventory substantially. The other advantages of jit system that it improves the management control over the inventory and theft and leakages and other manipulation in inventory is minimized. The JIT system also helps to control effectively spoilage or other deterioration.


Perpetual inventory  order system :- Under this system the inventory is being automatically updated and management re order the quantity when the system inform about the point at which inventory is to be re ordered. 

The great advantage of this system is that inventory level are updated in real time and the management has full information about inventory level. This arrangement improves management control over the important inventory items and their availability.

Martial requirement planning : under this system material is ordered as per the requirement of production department. The production schedule are prepared and on the bases of such schedule the material are ordered. This system is an extension of JIT system .

 In JIT system the immediate requirement determine the inventory re order quantity where in case martial requirement planing management prepare more detail plan of production and inventory level are maintain to support production process.

Advantages of perpetual Inventory System

Advantages of perpetual Inventory System

The perpetual inventory is basically a system which update the inventory record in real time. it means that inventory level changes with each purchase and sold transaction. The perpetual inventory system is gaining popularity with each day passing for the following advantages.

1. Easy to prepare the financial system without any delay. The stock form an important part of financial statements . The availability of stock figures from the books of accounts make the task of accountant very easy to prepare the financial statement.
2. Time Saved :- The inventory count in periodic system of inventory consumes a lot of time . The perpetual system saves the time as the inventory figure are already available and only needs to be confirmed by physical count.
3. Act as control Procedure :- This system is really helpful to identify any mistake or fraud in the inventory . the management can identify the mistake by the comparison of figures of physical count against figures of perpetual system.
4. Re order decision easier :- The stock level are available at all time so management can easily decide about the re order quantity.