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Order Point Determination

By Anonymous - Posted on 14 February 2012

There must be some method to show when the quantity of an item on hand has  reached the order point. There are many systems, but they all are inclined to be variations or extensions of 2 basic systems: the two-bin system and the perpetual inventory system.

Two-bin system

A quantity of an item equal to the order point quantity is set aside and not touched until all the main stock is used up. When this stock needs to be used, the production control or purchasing department is notified and a replenishment order is placed.

The two-bin system is a simple way of keeping control of C items. Because they are of low value, it is best to spend the minimum amount of time and money controlling them. However, they do need to be managed. When it is out of stock, C item becomes an A item.

Perpetual inventory record system
A perpetual inventory record is a continual account of inventory transaction as they occur. At any instant, it holds an up-to-date record of transactions. At a minimum, it contains the balance on hand, but it may also contain the quantity on order but not received, the quantity allocated but not issue and the available balance.

Permanent information is shown at the top of figure. Although not absolutely permanent, this information does not change frequently. It includes data as follows:
- Part number, name, and description;
- Storage location;
- Order point;
- Order quantity;
- Lead time;
- Safety stock;
- Suppliers.

Variable information is information that changes with each transaction and includes the following:
- Quantities ordered: data, order numbers and quantities;
- Quantities received: data, order numbers and quantities;
- Quantities issued: data, order numbers and quantities;
- Balance on hand;
- Quantities allocated: data, order numbers and quantities;
- Available balance.
The information depends of the needs of company and the particular circumstances.

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