Periodic Review Model

Definition

The periodic review model is an inventory management approach where stock levels are evaluated and replenished at regular intervals. This system helps organizations balance the costs of holding inventory against the potential risks of stockouts by scheduling reviews at set time periods, regardless of the inventory levels at that moment. By consistently monitoring inventory at predetermined intervals, businesses can respond effectively to demand fluctuations and ensure they maintain optimal stock levels.

5 Must Know Facts For Your Next Test

1. The periodic review model is typically used for items with stable demand patterns, allowing for more predictable inventory management.
2. Reviews are conducted at fixed intervals, such as weekly or monthly, which can simplify the ordering process but may lead to higher holding costs if demand varies significantly.
3. In this model, the order quantity is adjusted based on the current inventory level during each review, aiming to bring stock levels back to a predetermined target.
4. The periodic review model can be beneficial for businesses with multiple items, as it allows for consolidated ordering and reduced administrative burdens.
5. Businesses using this model must be aware of lead times when placing orders, as delays can lead to stockouts if not properly accounted for.

Review Questions

• How does the periodic review model differ from continuous review systems in managing inventory?
  • The periodic review model differs from continuous review systems in that it evaluates and replenishes inventory at fixed intervals rather than continuously monitoring stock levels. In a continuous review system, orders are placed whenever inventory reaches a specific reorder point, allowing for more immediate responses to changes in demand. Conversely, the periodic review model may result in stockouts or excess inventory if demand fluctuates significantly between reviews since decisions are made based on set time periods rather than real-time data.
• What are some advantages and disadvantages of using the periodic review model for inventory management?
  • Advantages of the periodic review model include simplified ordering processes and reduced management overhead, making it easier to handle multiple inventory items at once. However, disadvantages include the risk of stockouts if demand spikes between reviews and potentially higher holding costs due to excess inventory buildup. The model's fixed review schedule may not be flexible enough to accommodate significant changes in demand patterns, requiring businesses to carefully assess their inventory needs.
• Evaluate the impact of demand variability on the effectiveness of the periodic review model and suggest strategies to mitigate potential issues.
  • Demand variability can significantly impact the effectiveness of the periodic review model by causing stockouts during peak demand periods or excess inventory when demand drops unexpectedly. To mitigate these issues, businesses could implement safety stock strategies that account for demand fluctuations or adjust their review periods based on historical sales data. Additionally, integrating forecasting tools can help predict demand trends more accurately, allowing for better planning and minimizing risks associated with irregular demand.

Related terms

Reorder Point: The inventory level at which a new order should be placed to replenish stock before running out.

Safety Stock: Extra inventory held to prevent stockouts due to uncertainties in demand or supply lead times.

Economic Order Quantity (EOQ): A formula used to determine the optimal order quantity that minimizes total inventory costs, including holding and ordering costs.