Reorder Point and Periodic Review

Why it matters

The reorder point says at which level of the continuously reviewed inventory position replenishment is started. Physical stock, on the other hand, is the material at a given place at that moment. The two do not have to be the same number. If there is material on the way, physical stock may look low and yet a new order may not be needed. If there is unmet demand, the usable resource can be insufficient even though material is visible on the shelf. Calculating the threshold correctly is therefore not enough by itself; what is compared with it must also be correct. Opening the same order again and again usually comes not from the threshold calculation but from the inventory position not being updated.

In this lesson the inventory position is defined as usable physical stock plus open replenishment quantity minus demand that is unmet and still has to be delivered. Material that is unusable or awaiting acceptance keeps its physical presence but does not enter usable stock. Open replenishment has not yet arrived on the shelf either. The inventory position describes the net resource situation; it does not by itself show on which future day a shortage will occur. An order that will arrive late may look sufficient in total and yet not reach tomorrow's demand. The quantity calculation is therefore read together with delivery dates. Without time information, it is possible to draw a false delivery assurance from a correct total.

In periodic review, the ordering decision is not made after every movement. The inventory position is examined at set intervals and topped up to the target level. If demand rises right after the review, no new decision may be possible until the next review; after that, replenishment must also arrive. The protection period is therefore not just the replenishment but the sum of the review interval and the replenishment. Joint shipment and fewer administrative transactions can be an advantage; in return, a longer time may have to be protected for the same service. Continuous and periodic policies are not merely different calendars; inventory and record requirements also change.

When choosing, the service definition must be kept fixed. The target of no shortage in a cycle and the share of units filled immediately are not confused with each other. In a backorder system, unmet demand remains as a debt and is deducted from the inventory position. In lost sales, if the customer has given up, the same quantity is no longer a delivery debt; it should still be visible in the demand forecast. In both systems, converting the shortage quantity to zero is wrong. In one a debt record is needed, in the other a lost-demand record. This distinction makes sure that the ordering decision is correct today and that future need is not under-forecast.

Formula