Compare and contrast the continuous review system with the periodic review system. Is the continuous review or periodic review inventory system more likely to result in higher safety stock? Which is likely to require more time and effort to administer and why?
The continuous review system requires knowing physical inventory all the times, like using a barcode scanner every time cashier scans product purchased by the customer to update inventory. This method is more expensive to administer because inventory needs to update each time something goes out of shelf or comes into the shelf. It requires a lower level of safety since there is only uncertainty during the delivery period is the magnitude of demand. Therefore, during that time, the only safety stock required is for potential stockouts. (Wisner, Tan, Leong, Stanley, 2012, p.90).
The advantage of the continuous review system:
- Provide real-time updates of inventory counts
- Make easier to know when to order
- Provide accurate accounting
The disadvantage of the continuous system:
- Involves additional cost
The periodic review system, evaluate inventory at specific times like counting inventory at the end of each month. It is inexpensive to administer since counting takes place at a particular time, but a higher level of safety is required to buffer against uncertainty in demand over longer planning horizon. (Wisner et al., 2012, p.90).
The advantage of the periodic review system:
- Reduce time for business owner to analyze inventory counts
- Allows the business owner having more time to run another aspect of the business
- Simple to administer
- Save labor cost for counting
The disadvantage of the periodic review system:
- It may not provide an accurate inventory count when there is a high volume of sale
- It may also make accounting inaccurate
- There is little control over inventory movement
References:
Periodic and Perpetual Systems of Inventory Accounting. (n.d.). Retrieved March 01, 2017, from http://www.financialaccountancy.org/inventory-valuation/periodic-and-perpetual-systems-of-inventory-accounting/
Wisner, J. D., Tan, K., Keong Leong, G., & Stanley. (2012). Demand Forecasting and Inventory Management (pp. 89-91). Mason, OH: Cengage Learning.
Writer, L. G. (2011, October 10). What Is the Difference Between a Periodic and Continuous Inventory Review Policy? Retrieved March 01, 2017, from http://smallbusiness.chron.com/difference-between-periodic-continuous-inventory-review-policy-30967.html
Stephane Berube posted Feb 28, 2017 1:02 PM
The continuous review system entail that real supply is acknowledged in real time, so it will be costlier to implement than the periodic review system, but it will let you know that your physical inventory will match what is on your screen. The only concern with this system is that we are not sure of how many demand we will get during the “delivery lead time” (Wisner-Tan-Leong-Stanley, 2012, p. 90) period of those goods in order.
The periodic review system check the concrete stock pile at a distinct intermission of time. This system will be economical to use compare to the continuous review system, however this system will require an above normal limit of safety stock to avoid ambiguity with demand during an extended schedule perspective.
The continuous review system to my opinion would be the one requiring more time and effort to implement. The reason I have chosen this method is because of all the equipment and material that need to be involve in providing real-time data in regards of the physical inventory. Most company will have to invest into new computers and inventory software, new operating system if the old one can’t support the new software and bar code scanners to be able to read what goes in and out of the warehouse. One more thing that is important for all businesses is all the training that would need to be done with their employees, so that everyone is onboard with the new equipment.
Hello,
There are advantages and disadvantages for each of two methods:
The advantage of the continuous review system:
- Provide real-time updates of inventory counts
- Make easier to know when to order
- Provide accurate accounting
The disadvantage of the continuous system:
- Involves additional cost
The advantage of the periodic review system:
- Reduce time for business owner to analyze inventory counts
- Allows the business owner having more time to run another aspect of the business
- Simple to administer
- Save labor cost for counting
The disadvantage of the periodic review system:
- It may not provide an accurate inventory count when there is a high volume of sale
- It may also make accounting inaccurate
- There is little control over inventory movement
Dorothea Stach posted Feb 28, 2017 7:58 PM
Comparing the Continues Review System with the Periodic Review System as described on Page 89 – 91 in Textbook, Demand Forecasting and Inventory Management, Applications to Supply Chain Management by Wisner, Tan, Leong and Stanley, I certainly would give the continues review system with physical known inventory at any given time, my preference. Is it more expensive? Of course, but it also saves time and effort in terms of less physical inventory checks, minimizing lead times, physically adjusting re-order points over and over again, time consuming negotiations with suppliers to have better pricing on larger quantities. Time and effort are measurements, and they are convertible into money, or better, cost, operational cost, or margin, for that matter. The only uncertain variable in this equation is the demand vs the time span until the next delivery arrives, which can be covered by safety stocks.
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I just find the periodic review system very rigid. Why and Who determines what length the period might have? Are the periods flexible? Can they be shortened, lengthened? How is the periodic review system dealing with sudden changes in demand? This kind of continues review might work for very small companies, but for mid to large size companies it can turn into a road block, or bottle neck.
In a previous company I worked on SAP, a great live system! I would open my Material Master in the morning, check on quantities required, check my next re-order point compared to my inventory in stock and voila, convert my demand into purchase orders to send to my supplier. With SAP being live, (we always joked “alive”), all inventory is current, stock, WIP, finished goods, raw material. Now, imagine my shock when I started in another company, and my “ERP system” is pretty much a spread sheet (which I created in excel when I started at this company).
I am really trying to convince my Boss to join us in the 21st century and to invest into a better system.
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