Periodic Review Systems

Periodic Review Systems: A Comprehensive Guide for CPIM Exam Success

Introduction to Periodic Review Systems

Periodic Review Systems are a fundamental concept in inventory management and a critical topic within the CPIM (Certified in Production and Inventory Management) certification. Understanding how these systems work, when to apply them, and how they compare to other inventory management approaches is essential for both exam success and real-world application.

Why Are Periodic Review Systems Important?

Periodic Review Systems are important for several key reasons:

1. Simplified Administration: Unlike continuous review systems that require constant monitoring of inventory levels, periodic review systems only require attention at fixed intervals, reducing administrative burden and monitoring costs.

2. Coordinated Replenishment: They allow organizations to group orders from the same supplier, enabling consolidated shipments and potentially qualifying for volume discounts or reduced transportation costs.

3. Predictable Ordering Schedule: Fixed review intervals create predictable workload patterns for purchasing departments, making workforce planning and supplier coordination easier.

4. Practical for High-Volume, Low-Value Items: For C-class items (in ABC analysis), periodic review is often the most cost-effective approach because these items don't justify the expense of continuous monitoring.

5. Real-World Prevalence: Many retail and distribution environments use periodic review systems, making this knowledge directly applicable in practice. Think of a vendor who visits a store every Tuesday to check stock and replenish — that is a periodic review system in action.

What Is a Periodic Review System?

A Periodic Review System (also known as a Fixed-Interval Reorder System, P-System, or Fixed-Period System) is an inventory management approach where the inventory position is reviewed at fixed, predetermined time intervals. At each review, an order is placed to bring the inventory up to a predetermined maximum level, often called the target level, order-up-to level, or T-level (also denoted as R or S in some textbooks).

Key Characteristics:

- Fixed review interval (P): The time between reviews is constant (e.g., every week, every two weeks, every month).
- Variable order quantity (Q): The quantity ordered varies each period depending on how much inventory has been consumed since the last review.
- Target level (T): The maximum inventory level to which stock is replenished at each review.
- Protection period: The system must carry enough safety stock to cover demand variability during the review interval plus the lead time (P + L), not just the lead time alone.

Contrast with Continuous Review Systems (Q-System):

| Feature | Periodic Review (P-System) | Continuous Review (Q-System) |
In a Continuous Review System (Q-System):
- Inventory is monitored continuously or in real time
- A fixed quantity (Q) is ordered when inventory drops to the reorder point (ROP)
- Safety stock covers demand variability during lead time (L) only

In a Periodic Review System (P-System):
- Inventory is reviewed at fixed intervals (P)
- A variable quantity is ordered to reach the target level (T)
- Safety stock covers demand variability during the review interval plus lead time (P + L)

How Does a Periodic Review System Work?

Step-by-Step Process:

1. Set the Review Interval (P): Determine how often inventory will be reviewed. This could be based on supplier delivery schedules, economic analysis, or practical considerations. The review interval can also be calculated using the Economic Order Interval (EOI) formula.

2. Determine the Target Level (T): The target level must cover expected demand during the protection period (P + L) plus safety stock. The formula is:

T = d̄ × (P + L) + SS

Where:
- d̄ = average demand per unit time
- P = review interval
- L = lead time
- SS = safety stock

3. Calculate Safety Stock: Safety stock for a periodic review system accounts for variability over the entire protection period:

SS = z × σ_d × √(P + L)

Where:
- z = z-score corresponding to the desired service level
- σ_d = standard deviation of demand per unit time
- P + L = protection period (review interval plus lead time)

4. At Each Review, Calculate Order Quantity:

Q = T - Inventory Position

Where Inventory Position = On-hand inventory + On-order inventory - Backorders

5. Place the Order: The order is placed for quantity Q, which will arrive after lead time L.

Numerical Example:

Suppose:
- Average weekly demand (d̄) = 100 units
- Review interval (P) = 2 weeks
- Lead time (L) = 1 week
- Standard deviation of weekly demand (σ_d) = 20 units
- Desired service level = 95% (z = 1.65)

Step 1: Calculate Safety Stock
SS = 1.65 × 20 × √(2 + 1) = 1.65 × 20 × 1.732 = 57.2 ≈ 58 units

Step 2: Calculate Target Level
T = 100 × (2 + 1) + 58 = 300 + 58 = 358 units

Step 3: At Review, Calculate Order Quantity
If the current inventory position is 180 units:
Q = 358 - 180 = 178 units

Key Formulas Summary:

- Target Level: T = d̄(P + L) + z × σ_d × √(P + L)
- Safety Stock: SS = z × σ_d × √(P + L)
- Order Quantity: Q = T - IP (where IP = inventory position)
- Economic Order Interval: P = √(2S / Dh) where S = ordering cost, D = annual demand, h = holding cost per unit per year

Advantages of Periodic Review Systems:

- Simplified inventory tracking; no need for perpetual inventory systems
- Orders from the same supplier can be combined, reducing ordering and shipping costs
- Predictable workload for purchasing staff
- Well-suited for items with stable demand patterns
- Ideal for situations where a vendor or sales representative visits at regular intervals

Disadvantages of Periodic Review Systems:

- Higher safety stock requirements: Because the system must protect against demand variability over P + L rather than just L, more safety stock is typically needed compared to continuous review systems
- Risk of stockouts between reviews: If demand spikes between review periods, there is no mechanism to trigger an early order
- Less responsive to demand changes: Sudden shifts in demand are not detected until the next review
- Potentially higher carrying costs: Due to higher average inventory levels

When to Use Periodic Review Systems:

- When items are ordered from the same supplier and orders can be coordinated
- For low-value (C-class) items where continuous monitoring is not cost-justified
- When a vendor visits on a regular schedule
- When inventory records are not maintained in real time
- In environments where physical counts are done on a schedule

Exam Tips: Answering Questions on Periodic Review Systems

1. Know the Key Difference — Protection Period:
The single most tested concept is that periodic review systems require safety stock to cover P + L (review interval plus lead time), while continuous review systems only need to cover L (lead time). If a question asks why periodic review systems require more safety stock, this is the answer.

2. Master the Terminology:
Be comfortable with multiple names for the same system: P-system, fixed-interval system, periodic review, order-up-to system. The exam may use any of these terms interchangeably. Similarly, know that the target level may be called the order-up-to level, maximum level, or T-level.

3. Variable Quantity, Fixed Interval:
Remember the defining feature: fixed time between orders, variable quantity. This is the opposite of the Q-system where the quantity is fixed and the time between orders varies. Questions often test whether you can distinguish between these two systems.

4. Inventory Position vs. On-Hand Inventory:
When calculating the order quantity, always use inventory position (on-hand + on-order - backorders), not just on-hand inventory. This is a common trap in exam questions.

5. Practice the Calculations:
Be ready to calculate:
- Target level (T)
- Safety stock (SS)
- Order quantity (Q)
- The impact of changing the review interval on safety stock and average inventory
Make sure you can manipulate the formulas and understand the relationships between variables.

6. Understand Trade-offs:
Shorter review intervals mean more frequent ordering (higher ordering costs) but lower safety stock and more responsiveness. Longer review intervals mean fewer orders but higher safety stock and more risk of stockouts. The exam may present scenarios asking you to evaluate these trade-offs.

7. Watch for Hybrid System Questions:
Some questions may reference a min-max system or (s, S) system, which is a variation of the periodic review where an order is only placed if inventory drops below a minimum level (s) at the time of review. In this case, the order brings inventory up to the maximum level (S). Know how this differs from a pure periodic review system.

8. ABC Analysis Connection:
Periodic review systems are commonly associated with B and C items in ABC classification. A-class items typically warrant continuous review due to their high value. If a question asks which review system is appropriate for different item classes, remember this linkage.

9. Read Questions Carefully:
Pay attention to whether the question gives demand and standard deviation in daily, weekly, or monthly terms, and whether the review interval and lead time are in the same units. Unit conversion errors are a common source of mistakes.

10. Service Level and z-Score:
Know the common z-scores: 90% → 1.28, 95% → 1.65, 97.5% → 1.96, 99% → 2.33. The exam may provide a z-table, but memorizing the most common values saves time and reduces errors.

11. Impact Analysis Questions:
Be prepared for questions that ask what happens when a variable changes. For example:
- If the review interval increases, safety stock increases (because √(P+L) increases)
- If lead time variability increases, safety stock increases
- If you want a higher service level, z increases, so safety stock increases
- If you shorten the review interval, average inventory decreases but ordering costs increase

Final Summary:

Periodic Review Systems are a practical and widely-used inventory management approach. For the CPIM exam, focus on understanding the protection period concept (P + L), the formulas for target level and safety stock, the trade-offs compared to continuous review systems, and the practical situations where periodic review is preferred. Mastering these elements will prepare you to confidently answer any exam question on this topic.