Periodic Review System

Definition

A periodic review system is a method of inventory management where stock levels are reviewed at regular, predetermined intervals to determine if replenishment is needed. This approach helps businesses maintain optimal inventory levels, ensuring that they have enough stock on hand to meet customer demand while minimizing excess inventory costs.

5 Must Know Facts For Your Next Test

1. Periodic review systems can help reduce the costs associated with holding inventory by allowing businesses to order in larger quantities at set intervals.
2. This system can lead to stockouts if demand unexpectedly rises between review periods, so it's crucial to analyze historical demand patterns.
3. Different review periods can be set based on the nature of the product, such as fast-moving items having shorter review periods compared to slow-moving items.
4. The periodic review system can be simpler to implement than continuous review systems, especially for businesses with a large number of SKUs.
5. Inventory levels are adjusted based on forecasts and current demand trends during each review period, making accurate forecasting essential for this system's success.

Review Questions

• How does a periodic review system impact inventory turnover rates for businesses?
  • A periodic review system can significantly influence inventory turnover rates by optimizing the timing of replenishment orders. By reviewing stock levels at regular intervals, businesses can better align their orders with actual sales patterns. This leads to improved turnover rates as excess inventory is minimized, enabling companies to sell products more efficiently while still meeting customer demand.
• Discuss the advantages and disadvantages of implementing a periodic review system compared to a continuous review system in inventory management.
  • Implementing a periodic review system offers several advantages, including simplicity and ease of use for managing large inventories. It allows businesses to consolidate orders and potentially reduce ordering costs. However, disadvantages include the risk of stockouts if demand fluctuates unexpectedly between reviews and less responsiveness to immediate changes in sales trends compared to continuous systems. Balancing these factors is critical when deciding which approach to use.
• Evaluate how a company's choice of review period in a periodic review system affects its overall supply chain efficiency and customer satisfaction.
  • The choice of review period in a periodic review system has a direct impact on supply chain efficiency and customer satisfaction. A shorter review period allows for more frequent assessments and quicker responses to changing demand, potentially improving service levels and reducing stockouts. Conversely, longer review periods might lead to excess inventory or delayed responses to market shifts, harming customer satisfaction. Therefore, aligning the review period with product demand patterns is essential for maintaining an efficient supply chain while keeping customers happy.

Related terms

Inventory Turnover: A measure of how quickly inventory is sold and replaced over a specific period, indicating the efficiency of inventory management.

Reorder Point:

The inventory level at which a new order should be placed to replenish stock before it runs out, taking into account lead time and demand.

Safety Stock:

Extra inventory held as a buffer against uncertainty in demand or supply chain disruptions, ensuring that stock is available during unexpected fluctuations.