The ordering level is controlled through the following techniques:
Two Bin System:
Under this system, the inventory item is divided into two parts. One part is active one from which issues are made. The other part is kept reserved and touched only when the active part is exhausted. It is also known as the bin reserve system. When the reserve part is touched, a fresh order is placed to replenish the stock. The reserve part becomes active and the earlier active part which is exhausted is replenished with the fresh stock. The fresh order is placed for the fixed quantity. The quantity in the reserve part serves as a reordering level. It is not necessary to provide for two separate bins. It is a notional presentation. The two parts can be segregated even by the line. This method is, applicable to low cost, high volume items which have consistent usage. This method does not involve any record keeping.
Mini Max System: Under this system, when the inventory item reaches to a predetermined minimum level, it is replenished by the fresh purchase up to the predetermined maximum level. The minimum level serves as a reordering point. The fresh order is placed for that much quantity which shows deficiency in maximum level. Thus, the size of the order is variable rather than fixed. Like the two bin system, this method is applicable to low cost, high volume parts with consistent usage.
Imprest System: Under this system, the reordering is made at regular time intervals. The maximum level of each item is predetermined. At particular fixed period, say after one week a fresh collective order for all the items will e placed. The size of the order will be decided on the basis of the shortage indicated by the existing stock in relation to the maximum level. Thus, the quantity of replenishment will exactly equate the quantity consumed during the period. The size of the order will vary considerably.
Physical verification of materials: Proper stock records are kept in the bin card as well as the stores ledgers. When the materials are received or issued, they are properly recorded and the new balance is struck at the end of every transaction. Principally the bin must contain the quantity which is shown in balance column of the bin card. But sometimes, the book balance and the quantity physically do not tally. The important reasons for such discrepancies are as under:
1) Wrong recording in the bin card
2) Placement of the material in the wrong bin
3) Mixing in adjacent bin
4) Loss due to breaking the bulk
5) Evaporation of alcoholic materials
6) Pilferage etc
However, such situation emphasizes the need for physical verification of the materials stocked in the sores room.
There are the following two popular methods of the stock verification:
A) Periodic inventory verification, and
B) Perpetual inventory verification
Periodic inventory verification: Under this method, all items of the stores room are verified counting, weighting, measuring etc at the end of the specific period usually the last day of the accounting year. They can also be verified at the end of every quarter or six moths. However, in the light of the huge task of verification, usually they are verified only once and that too on the last day of the accounting year. It is also required by the accounting system to value the stock-in-hand on the last day of the year for the purpose of preparing the annual accounts. The issues are not made during the verification to the size of the inventory. Additional staff is employed for the huge verification task. This method gives correct picture of the stock-in-hand on the last day of the accounting year.
Perpetual inventory verification: Under this method, the verification function becomes a continuous function rather than a year end function. All the items are verified on continuous basis. Under this system all items are not verified at a time like year end verification. Generally, those items which have reached a minimum level are selected for the verification. This policy reduces the burden of verification. The verification work is arranged in such a way that every item is verified twice or thrice during the year on rotation basis. This system does not necessitate the employment of any special staff for verification. The store keeper carries on the verification work according to his convenience. Moreover, it is easy to locate the reasons for the discrepancies promptly. In fact, it serves as a deterrent to pilferage. Such control is not possible under year end verification. The main limitation of this method is that the valuation of the ending inventory is made on the basis of book figures rather than on the basis of actual physical verification.