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Continuous Review and Periodic Review

The document discusses different methods for reviewing inventory levels and determining reorder amounts. Continuous review involves constantly monitoring inventory levels and placing replenishment orders as soon as levels fall below a reorder point. Periodic review involves reviewing inventory levels at set intervals and placing orders if levels are below the reorder point. Order quantity methods fix the amount ordered each time, while order up-to level methods set a target level and order the difference between current inventory and that level. These methods can be combined, resulting in four basic reordering processes.

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384 views15 pages

Continuous Review and Periodic Review

The document discusses different methods for reviewing inventory levels and determining reorder amounts. Continuous review involves constantly monitoring inventory levels and placing replenishment orders as soon as levels fall below a reorder point. Periodic review involves reviewing inventory levels at set intervals and placing orders if levels are below the reorder point. Order quantity methods fix the amount ordered each time, while order up-to level methods set a target level and order the difference between current inventory and that level. These methods can be combined, resulting in four basic reordering processes.

Uploaded by

Sakline Minar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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continuous Review and Periodic Review

These terms refer to the frequency of review to determine when orders must be placed for
replenishment.

In the continuous review process, the inventory levels are continuously reviewed, and as soon as
the stocks fall below a pre-determined level (usually called, reorder point, or reorder level),
replenishment order is placed. As more and more companies start using sophisticated IT systems
to track their inventories in real-time, the continuous review method becomes a viable and
optimal way to plan for replenishment.

Under periodic review, the inventory levels are reviewed at a set frequency. At the time of
review, if the stock levels are below the pre-determined level, then an order for replenishment is
placed, otherwise it is ignored till the next cycle. This method provides a viable process
alternative to the continuous review by segmenting the merchandise into review buckets. This
makes it easier to manage when the process is manual, or the number of items involved is
extremely large, or when constraints on ordering-day exist.

Order Quantity and Order up-to Level

These terms refer to the process that is used to determine how much is ordered when a
replenishment order is placed.

In the first process, the “order quantity” is fixed. If the review determines that an order should be
placed, then the order for a pre-defined quantity for that item-location combination is placed for
replenishment. The order quantity for all replenishment orders is fixed in this method, though
order day may vary or may be fixed depending on the review method.

The second process defines a pre-determined “order up-to level” instead. The actual order
quantity is determined as the difference between the on-hand stock on the review day, and the
pre-determined “order up-to level”. The order quantity in this process will differ from one order
to another depending on the on-hand quantity on the day of the review.

Between these two sets of parameters, four basic reordering process options become available.

Options for Re-ordering Process

Based on the above two parameters, the reordering process can be deployed in the four basic
ways. The diagrams below depict these variations of the process.
 Modeling of the Time Axis

Inventory policies differ in two aspects, namely the mechanism used to trigger
replenishment orders and the decision rule that specifies the determination of the
order size. The specific inventory policies are defined through the combination of
the decision variables s (reorder point), r (review interval, order cycle), q (order
quantity) and S (order level) as follows:

 (s,q) policy,
 (r,S) policy,
 (s,S) policy.

(s,q) policy

Under the (s,q) policy, the point in time at which replenishment orders are
triggered, depends on the size of the reorder point s, whereas the order quantity
q is constant over time. In the ideal (textbook) form of the (s,q) policy, the
inventory position is continuously monitored. The inventory position is the sum of
the inventory on hand plus the inventory on order minus the outstanding
backorders (backlog). The inventory management system (or the inventory
manager) acts according to the following decision rule: If at a review instant the
inventory position has reached the reorder point s (from above), then launch a
replenishment order of size q.

In reality the inventory is not monitored continuously. In contrast, the


replenishment decisions are made in discrete time intervals, usually at the end of a
day. In addition, often demand sizes are greater than one unit. Under these
conditions, the analysis of the (s,q) policy as presented in many textbooks in false,
as the so-called undershoot is neglected. In the above figure, the undershoot is the
difference between s and the inventory position at the moment immediately before
a new replenishment order is released. Negleting the undershoot usually results in
significant over-estimation of the service level (under-estimation of the required
safety stock).

(r,S) policy
If an (r,S) inventory policy is in effect, the points in time at which replenishment
orders are released are determined through the review interval r. The inventory
management system proceeds according to the following decision rule: In constant
intervals of r periods launch a replenishment order that raises the inventory
position to the target order level S. Obviously, the (r,S) policy is an inventory
policy with periodic review. The order size at a time of a review depends on the
demands and the development of the inventory observed in the preceding periods.
If r=1, then this poliy is called base-stock policy.

(s,S) policy

Under an (s,S) inventory policy, the points in time when an order is triggered are
determined policy, i. e. through the reorder point s. However, the order quantity is
now, similar to the (r,S) policy, a function of the inventory development over time.
In the literature this policy is sometimes characterized with the help of a third
parameter which specifies the length of the review interval r. In this notation the
policy is called (r,s,S) policy. In the case of r=0, continuous review is in effect. If
demands arrive unit-sized, then the (r=0,s,S) policy is identical to the (s,q) policy
with continuous review.

For the determination of the optimum safety stock under conditions of uncertainty
the demand during the risk period plays a central role.

The risk period is composed of

 the review period and


 the replenishment lead time.

Stochastic demand occurs within this time span that usually comprises several
periods. In order to compute the parameters of an inventory policy, we must know
the probability distribution of the demand during the risk period.

 Demand during the Risk Period

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