Traits/Characteristic Of This System:

·  A pre-determined re-order level is set for each stock item;

·      Once the stock falls below the re-order level, a replenishment order is issued and

·      This is like a two-bin, where stock is segregated into two bins, once stock from bin no 1 is depleted a replenishment order is initiated

Advantages of Using the Re-Order System method:

·      Convenient to use as the generation of a replenishment order is automatic by comparing each stock item level against its re-order level;

·      Seems to be more responsive to fluctuation in demand;

·       Lower stocks on average;

·       Suitable for widely differing types of stock within the same business.

Disadvantages of Using the Re-Order System method:

·      Might not be suitable where stock item has variable demand, ordering costs etc as the computation of Economic Order Quantity(EOQ) is less accurate:

·      Stock item  for re-ordering does not follow a fixed sequence;

·      Many individual stock items may reach re-order level at the same time hence overloading the re-ordering system.

Illustration:

Assuming the following data for Stock A:

Normal usage  100 per day

Minimum usage 50 per day

Maximum usage 120 per day

Lead Time  30-40 days

EOQ  6,000

Compute the various stock control level?

Re-order level

=Maximum usage x Maximun Lead Time

=120 x 40

=4,800 units

Minimum level

=Re-order level- Average Usage for Average Lead Time

=4,800 -(100 x35)

=1,300 units

Maximum level

=Re-order level + EOQ -Minimum usage in lead time

=4,800+6,000-((50 x 30)

=9,300 units