Periodic Review System Inventory Models

A periodic inventory review system is one where inventory is checked and reordered at a set time interval (e.g. weekly). In this case the quantity ordered varies based on the amount of inventory on hand following the review. The danger of this system is that inventory is not being checked until the review system. The benefit is that since inventory levels are only checked periodically, the administrative cost of the system can sometimes be less than with a fixed order quantity (EOQ) model.

The Order Quantity with Demand Uncertainty

The formula for calculating the quantity to order is:

Fixed Order Quantity = Q = d(T+L) + zσT+L – I, where

  • q = Quantity to be ordered
  • T = the number of days between reviews
  • L = the lead time in days (the time between placing an order and receiving it)
  • d = Average daily demand
  • z = the z-score of the normal distribution given a desired service level
    • z = NORMSINV(z), using Microsoft Excel
  • σT+L = Standard deviation of demand over review and lead time
    • σT+L = SqRoot[(T+L) * (σ^2) * D]
  • I = Current inventory level (includes items on order)