How Review Period impacts inventory policies?
Review period is very important to consider when deciding a inventory policy. Not only lead time will directly impact on your supply chain, but the length of the review.
You won’t always have a round number for review period. For this calculus you need to be aware of the following things:
- Order up-to level: the demand over the lead time plus the demand over review period.
- Cycle stock: the amount of product ordered each cycle.
- In-transit inventory: orders still in transit, before arriving at the stock.
Finally, the review period itself. A lot can happen that will make your review period not a round number. We will investigate two methods indicated by supply chain specialist Nicolas Vandeput. The first on is a Simple Rounding and the second is the Power-of-2 Policy.
Simple Rounding
In this method, the idea is to set a review period T as a multiple of a base time period, that may be a day or a week. So, this base period is the possibility to make an order.
This is a good technique for supply chains that deal with only one item. But as most supply chains must deal with multiple items, is not a good idea keeping track of innumerous order schedules.
For group different orders at one specific point in time, having the same periodic review for multiple products, Vandeput suggests the second method, which we’ll talk about.
Power-of-2 Policy
This method was first discussed by Maxwell and Muckstadt in 1985. It’s a practical way to round the review period of a multiple of a base time period then multiply it by a power-of-2.
The result of doing that is dividing products in smaller categories, following their optimal review period. This will help reduce the complexity of the schedules.
Vandeput also states that in theory this could increase a little the total cost. But in practice it’s much more probable that it will reduce the total cost.
That’s because it will reduce the numbers of transactions, grouping different items. So, you will make less transactions and spend less, even if the cost for one increase.
Historical Demand over Demand Forecasting
Both models use data from historical demand to capture reorder points and up-to level orders. Vandeput suggests that you can use demand forecast instead, that may be based in external insights that will improve the setting of your policy.
The thing about historical data is that it allows you to use previous decision to measure your review. So, you have better control of your policy and can make less risky choices.
Of course, both may be implemented together, but the ideal is to equalize the data to make the decision. With continuous reviews, managers can identify weakness and strengths in the supply chain and adjust their policies.
So, why review period?
A periodic review will help estimate the quantity of item the company has on-hand. A good thing about that is that the inventory is checked at specific times, freeing time to manage other aspects of the supply chain.
It is also simple to administer, since you only need to analyze inventory counts from time do time. That also saves labor costs for counting inventory and managing supply.
The formulas for review periods
A lot of the concepts introduced in the article uses formulas to be defined. We established what they are first so it will make easier to understand how the formula operates for each one.
- Order-up to level: it’s defined as demand over lead time plus the demand over the review period. Its formula is S = dL + dR = d*L + d*R
- Cycle Stock: the demand over the review period. Which makes Cs = ½*dR
- In-transit Inventory: the expected level of in-transit is notated Is = dL
- Review Period: finally, we get to T* = sqrt2k/hD
Limitations of Periodic Reviews
The major problem with periodic reviews is the impossibility to order in-between review periods. So, if you run out of stock before the next one, you’ll need to wait for the next review to order more.
This makes the policy riskier of losing sales. Another issue is the variation of quantity, which directly impacts the operational flow. In a continuous review you can place an order as soon as you run out of stock, minimizing the impact on customers.
In sum
Having a good review period that resides in data and historical demand will help your supply chain be more effective. Also, both policies, each with its own advantages, can help you cut costs.
Finally, as the lead time grows, the up-to level inventory in a fixed review period policy will also changes, it won’t be simply the expected average stock on-hand. This must be considered when refining a good periodic review inventory policy.
With Supply Brain demand prediction and inventory optimization module, it is possible to analyze historical data correlated to external trends and thus achieve greater accuracy in demand prediction.
With greater assertiveness we can build more efficient simulations of the chain behavior, allowing us to visualize different scenarios for optimization and planning.
Schedule a demonstration!
