An inventory system that is used to manage indepen-dent demand inventory. The inventory level for an item is checked at regular intervals and restocked to some prede-termined level.
One of the simplest approaches to managing independent demand inventory is based on a periodic review of inventory levels. In a periodic review system, a company checks the inven-tory level of an item at regular intervals and restocks to some predetermined level, R. The actual order quantity, Q, is the amount required to bring the inventory level back up to R. Stated more formally:
|Q = R – I||(11.1)|
Q = order quantity
R = restocking level
I = inventory level at the time of review
Figure 11.6 shows the fluctuations in the inventory levels of a single item under a two-week periodic review system. As the downward-sloping line shows, the inventory starts out full and then slowly drains down as units are pulled from it. (Note that the line will be straight only if demand is constant.) After two weeks, the inventory is replenished, and the process begins again.
Periodic Review System
PART IV • Planning and Controlling Operations and Supply Chains
A periodic review system nicely illustrates the use of both cycle stock and safety stock. By replenishing inventory every two weeks, rather than daily or even hourly, the organization spreads the cyclical cost of restocking across more units. And the need to hold safety stock helps to determine the restocking level. Increasing the restocking level effectively increases safety stock: The higher the level, the less likely the organization is to run out of inventory before the next replenishment period. On the flip side, because inventory is checked only at regular inter-vals, the company could run out of an item before the inventory is replenished. In fact, that is exactly what happens just before week 6 in Figure 11.6. If you have ever visited your favorite vending machine, only to find that the item you wanted has been sold out, you have been the victim of a periodic review system stockout.
As you might imagine, a periodic review system is best suited to items for which periodic restocking is economical and the cost of a high restocking level (and hence a large safety stock) is not prohibitive. A classic example is a snack food display at a grocery store. Constantly moni-toring inventory levels for low-value items such as pretzels or potato chips makes no economic sense. Rather, a vendor will stop by a store regularly and top off the supply of all the items, usu-ally with more than enough to meet demand until the next replenishment date.