Periodic Review System

Definition

A periodic review system is an inventory management approach where stock levels are reviewed and replenished at regular intervals, rather than continuously. This system helps businesses maintain adequate inventory levels by setting specific review periods, allowing for planned assessments of stock and facilitating the reordering process. By using this method, companies can effectively manage safety stock and reorder points to balance costs and service levels.

5 Must Know Facts For Your Next Test

1. Periodic review systems are characterized by fixed review intervals, such as weekly or monthly, which simplifies the monitoring process.
2. When stock is reviewed, orders are placed to bring inventory levels up to a predetermined target level, which may include safety stock.
3. This system is often used in environments with predictable demand patterns, allowing for efficient planning and reduced costs associated with overstocking or stockouts.
4. The periodic review system can help balance inventory holding costs with service level goals, ensuring that businesses can meet customer demand without excess inventory.
5. It is particularly useful for managing products with stable demand, where the lead time and variability are well understood.

Review Questions

• How does a periodic review system enhance inventory management compared to a continuous review system?
  • A periodic review system enhances inventory management by allowing businesses to evaluate their stock levels at set intervals instead of continuously monitoring them. This approach simplifies the ordering process and reduces administrative workload. By assessing inventory at regular times, businesses can better plan for replenishment while also managing safety stock effectively. It also helps organizations align their ordering frequency with demand patterns and lead times.
• Evaluate the role of safety stock in a periodic review system and how it affects reorder point calculations.
  • Safety stock plays a crucial role in a periodic review system as it serves as a cushion against uncertainties in demand and supply during the lead time. When calculating reorder points in this context, businesses must consider both average demand and variability to ensure they have enough safety stock on hand to prevent stockouts. A well-calculated safety stock allows for smoother operations and ensures that products remain available for customers while minimizing excess inventory costs.
• Assess how changes in lead time can impact the effectiveness of a periodic review system and propose strategies to address potential challenges.
  • Changes in lead time can significantly impact the effectiveness of a periodic review system by altering the timing of reorder points and potentially leading to stockouts or overstock situations. If lead times increase unexpectedly, companies may need to adjust their review intervals or target levels to accommodate this change. Strategies to address these challenges include implementing more frequent reviews during periods of uncertainty, enhancing supplier relationships to reduce lead times, and employing demand forecasting techniques to better predict future needs based on historical data.

Related terms

Safety Stock:

A buffer inventory held to mitigate the risk of stockouts caused by uncertainties in supply and demand.

Reorder Point:

The inventory level at which a new order should be placed to replenish stock before it runs out.

Lead Time:

The time taken from placing an order until the inventory is replenished and available for use.