of that order. Many, if not most, transactions reporting systems are equivalent to periodic review systems.’ The same is true at the time of writing, over 30 years later. For example, if the inventory records are up to date online continuously but the orders to a given supplier are issued at the end of the day (or at the end of any unit time period) then the system is one of periodic review with inventory levels being reviewed once a day (or once per time period). Transactions reporting systems are often referred to as continuous review systems although, strictly speaking, they are not the same thing.
There are two fundamental differences between continuous and periodic review systems. These differences relate to the following: (i) what triggers a new test for reordering and (ii) the time interval over which uncertainties in demand need to be taken into account.
With regard to the former, in periodic review systems an elapsed fixed time interval (the review interval) is what triggers an assessment of the stock status to decide whether a replenishment order should be raised. The test for reordering is triggered by time‐interval considerations, and this is the reason why periodic review systems are also referred to as reorder interval systems. In continuous review systems, a reduction of the stock level (when a new transaction occurs, regardless of its magnitude) is what triggers the assessment of whether a new order should be placed on the supplier(s). So, the test for reordering is triggered by inventory level related considerations, and this is the reason why continuous review systems are also referred to as reorder level systems. The difference between the two types of systems is depicted graphically in Figure 2.2. This issue is further discussed in Section 2.4.2.
With regard to the time interval over which uncertainties need to be compensated, there are two major sources of uncertainty. The first one is that demand is ‘stochastic’. This means its occurrence and magnitude are subject to variations due to chance; demand can take on different values, each with an associated probability. This issue is discussed in detail in Chapter 4. Stochastic demand varies over time and is uncertain, and thus needs to be predicted. If demand were ‘deterministic’ (i.e. constant or non‐constant over time but known with certainty), then it would be straightforward to decide how much we need to keep in stock to satisfy future demands.
Figure 2.2 Periodic review and continuous review systems.
The second source of uncertainty relates to the passage of time during which uncertain demand poses a risk of a stockout. This time lapse differs between continuous and periodic review systems. For continuous review, it is the time interval between placing an order and the received order being available for customers. This time interval is called the lead time, of length
For continuous review, the lead time is called the protection interval, because stocks are held to protect against a stockout during that period of time. (See Technical Note 2.4 for a discussion of an exception to this rule.) If the lead time is constant and known to be
For periodic review systems, the protection interval not only includes the lead time but also an additional amount of time that needs to be taken into account. If orders are placed at the end of the review interval, of length
What is the more appropriate review system for intermittent demand items? Although this is discussed in more detail in Section 2.5, at this stage it is sufficient to say that practical considerations point to the periodic systems being preferred. Often, items may be produced on the same piece of equipment, purchased from the same supplier, or shipped using the same transportation mode. In any of these situations, co‐ordination of replenishments may be attractive (Silver et al. 2017). Periodic review is appealing because all items in the co‐ordinated group can be given the same review interval. Sani (1995) noted that reorder interval or product group review systems are the most commonly used in practice for intermittent demand items (see also Teunter and Sani 2009a).
The main advantage of continuous review is that, to provide the same level of customer service, it requires less stock than periodic review. As previously discussed, this is because, in a periodic review system, stock is used to compensate for any uncertainties regarding demand over the review interval as well as the lead time. Under continuous review, the stocks are determined by considering lead time demand requirements only. Moreover, for intermittent demand items very little costs are incurred by continuous review as updates are made only when a transaction occurs. The relationship between ordering cost and inventory holding charge can be further explored so as to decide on the appropriateness of each type of system.
Quantifying the advantages and disadvantages of periodic and continuous review is not straightforward. However, periodic policies are more simple and convenient than continuous policies, which is a very important point from a practical perspective. So we may conclude that the practical advantages of periodic review explain its popularity in real‐world applications.
