Two-bin inventory control
/What is Two-Bin Inventory Control?
Two-bin inventory control involves the storage of goods in two bins, one of which contains working stock and the other containing reserve stock. The amount of inventory kept in the reserve stock bin equals the amount the company expects to use during the ordering lead time associated with that item. To use this system, one should reorder goods as soon as the working stock bin is empty, so that replacement parts arrive before the reserve stock bin is empty. It is possible to fine-tune the inventory investment by altering the amount of goods kept in the reserve stock bin.
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How to Calculate the Reserve Stock Level
The calculation for the amount of inventory to keep in the reserve stock bin is to multiply the daily usage rate by the lead time, and then add the safety stock amount. The formula is as follows:
(Daily usage rate × Lead time) + Safety stock = Reserve bin quantity
Two-bin inventory control is commonly used for low-value items that can be purchased and stored in bulk, and for which stocks are maintained in the production area, rather than the warehouse. More expensive inventory items are controlled with a perpetual inventory system, in order to maintain tighter control over the firm’s working capital investment.
Advantages of Two-Bin Inventory Control
This system requires no computer database. Instead, the re-ordering process is based on a visual inspection of bins. This is especially useful when a firm is maintaining large quantities of low-cost parts, and does not want to bother with ongoing cycle counts of the inventory.
Example of Two-Bin Inventory Control
For example, a company experiences weekly usage of 500 units of a purple cell battery, so the daily usage rate is 100 units. The lead time for the battery is three days. The reserve storage bin should contain at least 300 batteries, to cover expected usage during the three-day lead time. In addition, the company assumes that usage levels can vary by as much as 25% from the average usage rate. Consequently, 75 additional batteries are kept in the reserve storage bin. This is calculated as 300 reserve units × 25% safety stock allowance. Thus, the total reserve stock is 375 units.