Instructor:

Cecil Bozarth , PhD
North Carolina State University
Author of "Introduction to Operations and Supply Chain Management," 2nd edition, Pearson, Prentice-Hall

SECTION Index

Introduction

Functions and Drivers of Inventory

Independent vs. Dependent Demand Inventory Systems

Two Classic Independent Demand Systems

   1. Periodic Review System

   2. Perpetual System

EOQ, Reorder Point, and Safety Stock Analysis

   1. EOQ Model

   2. Safety Stock Analysis

   3. Reorder Point Formula

Summary

References

Related
SITE LINKS

Inventory Positioning in the Distribution Channel

Inventory Management Models : A Tutorial

PERIODIC REVIEW SYSTEM

The two classic systems for managing independent demand inventory are periodic review and perpetual review systems. This section focuses on the Periodic Review System.

What is a Periodic Review System?

EXAMPLE 1

EXAMPLE 2

What is a Periodic Review System?

• Classic independent inventory system

• Inventory levels start at some restocking level, R

• At regular time intervals (ex. - 3 days, two weeks, etc.), the inventory level is reviewed.  This new inventory level is called I.

• Some amount, Q, is added to bring the inventory level back up to R:

Q  =  R – I

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EXAMPLE 1

• A retailer reviews the inventory for a certain product every 3 days.  The restocking level is 20.                                

• If the inventory level is low, new items are available in the storeroom and are immediately brought out:

Determining the restocking level

Where:

	=	average demand during the reorder period plus thereplenishment lead time (if there is a delay getting new products in).
SS	=	safety stock.  This is a “cushion” of inventory held to mitigate the uncertainties of forecasts and lead times. Higher safety stock levels increase the likelihood that goods are available, but also drive up inventory levels and costs

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EXAMPLE 2

• A pharmacy sells an over-the-counter drug, Vaxidene.                     

• Every 10 days, the vendor comes by to check the inventory levels and order more of the drug.                                         

• It takes about 3 more days to get the new order in.                   

• Demand per day is about 20 bottles, but can vary.                              

• The pharmacy would like to keep a safety stock of about 30 bottles to protect against stockouts, just in case demand levels or lead times are greater than expected.

Solution

GRAPHICS

	=	13 days * (20 bottles) = 260 bottles
SS	=	40 bottles
	=	260   +    40
	=	300 bottles

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