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PERIODIC REVIEW MODEL WITH PROBABILISTIC DEMAND 437

of stock-outs. For Dabco, this additional inventory or safety stock was 41 units, with an
Try Problem 17 as an
example of an order- additional annual holding cost of E49. The Management Science in Action,Lowering
quantity, reorder point Inventory Cost at Dutch Companies, describes how a warehouser in the Netherlands
model with probabilistic implemented an order-quantity, reorder point system with probabilistic demand.
demand.

NOTES AND COMMENTS

he Dabco reorder point was based on a 5 per has a 95 per cent service level. However, other def-
T cent probability of a stock-out during the lead- initions of service level may include the percentage
time period. So, on 95 per cent of all order cycles of all customer demand that can be satisfied from
Dabco will be able to satisfy customer demand with- inventory. Thus, when an inventory manager
out experiencing a stock-out. Defining service level expresses a desired service level, it is a good idea
as the percentage of all order cycles that do not to clarify exactly what the manager means by the
experience a stockout, we would say that Dabco term service level.

10.8 Periodic Review Model with Probabilistic Demand

The order-quantity, reorder point inventory models previously discussed require a
continuous review inventory system. In such a system, the inventory position is
monitored continuously so that an order can be placed whenever the reorder point
is reached. Computerized inventory systems can easily provide the continuous
review required by the order-quantity, reorder point models.
Up to this point, we have An alternative to the continuous review system is the periodic review inventory
assumed that the system. With a periodic review system, the inventory is checked and reordering is
inventory position is
reviewed continuously so done only at specified points in time. For example, inventory may be checked and
that an order can be orders placed on a weekly, biweekly, monthly or some other periodic basis. When a
placed as soon as the firm or business handles multiple products, the periodic review system offers the
inventory position advantage of requiring that orders for several items be placed at the same preset
reaches the reorder
point. The inventory periodic review time. With this type of inventory system, the shipping and receiving
model in this section of orders for multiple products are easily coordinated. Under the previously dis-
assumes probabilistic cussed order-quantity, reorder point systems, the reorder points for various products
demand and a periodic can be encountered at substantially different points in time, making the coordination
review of the inventory
position. of orders for multiple products more difficult.
To illustrate this system, let us consider Dollar Discounts, a firm with several
retail stores that carry a wide variety of products for household use. The company
operates its inventory system with a two-week periodic review. Under this system, a
retail store manager may order any number of units of any product from the Dollar
Discounts central warehouse every two weeks. Orders for all products going to a
particular store are combined into one shipment. When making the order quantity
decision for each product at a given review period, the store manager knows that a
reorder for the product cannot be made until the next review period.
Assuming that the lead time is less than the length of the review period, an order
placed at a review period will be received prior to the next review period. In this case, the
how-much-to-order decision at any review period is determined using the following:

Q ¼ M H (10:38)

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