Periodic inventory system: What is it?
In today’s article I am going to talk about what the periodic inventory system is, as well as its main advantages and disadvantages compared to fixed quantity models.
I hope you find it useful.
I am going to start by saying that an inventory control system cánido be divided into two.
On the one hand it is divided into a one-period system and on the other hand we have the multiple-period system.
However, the multiple period system is also usually divided into two.
On the one hand we have the fixed order quantity models (better known as economic order quantity) and on the other hand we have the fixed period models (also know as periodic system of inventories).
Well, today I am going to focus on fixed period models.
Shall we start?
periodic system in books
If you want to rely on books related to the Operative administrationthen the fixed period models cánido be called in different ways, some are the following:
- periodic system.
- Periodic review system (P).
- Fixed interval reorder system.
- P model
- Fixed interval system.
- Periodic reorder system.
- Fixed period inventory system.
With that you will be able to find the subject easier.
If you look for it in English, you cánido find it as Fixed period system (FPS).
What is the periodic inventory system?
A periodic inventory system cánido be seen as an inventory control model where the orders placed by a company are made until the end of a certain period.
In such a way that only at that moment the amount of inventory that the company has is known.
Whereby, In fixed-period inventory systems, the amount of inventory held is counted only at equipo time intervals and not on an ongoing basis. (as is done in fixed order quantity models).
Difference between a periodic and perpetual inventory system?
Models like economic order quantity belong to the category called fixed order quantity models.
They are fixed quantity models or Q system.
These models have the particularity that each time the inventory or inventory position decreases to the reorder pointthen an order is placed for Q units.
Therefore, in a fixed quantity system you need to continuously monitor the amount of inventory you have and that is why It is called the perpetual inventory system.
Now, as I said before, in a periodic inventory system you do not have to constantly monitor the inventory level, but rather it is done in periods.
Just then the inventory is counted and the order is placed.
Another important difference is the fact that In the periodic inventory system, the number of units to be ordered cánido vary, but in a fixed quantity model, this is not the case (it is always the same).
Graph showing the operation of a fixed period inventory system
So that you cánido see the operation of a fixed period inventory system, I am going to put the following image:
As you perro see in the previous image, the period in which you are going to place the order is always the same, however the number of units that you are going to order may vary from one order to another and you always place the order in such a way that it arrives to what is often called the objetivo quantity (T).
For example, if your objetivo quantity is 100 units, then whenever you place an order you have to do it in such a way that your units return to 100 units (no more and no less).
How is the inventory level?
In a periodic inventory system, orders for different quantities (Q) are made at regular intervals (p) taking into account that the inventory level always has to reach the objetivo quantity (T).
I’ll give you a fácil example.
Suppose the objetivo quantity is 100 units.
Now, let’s assume that today you have to place the order.
Therefore, the amount of inventory that is available is counted and it is obtained that the company has 10 units.
Therefore, the order to be placed is 90 units.
This is because you have 10 units and you have to bring your units up to the objetivo amount (100 units).
So, you have to place an order for 90 units.
Now, let’s imagine that one more period passes and that only 50 units were sold.
Therefore, now the order will be only 50 units.
Advantages of a periodic inventory system
Of course, the biggest advantage of a periodic inventory system compared to a Q or fixed quantity system is the fact that in the fixed period inventory system you don’t have to be monitoring inventory continuously (every time it is sold). draws one unit from inventory).
This may prove to be administratively convenient and may be considered as a simpler system.
Therefore, with a periodic inventory system it is possible to save costs for ordering and transportationsince all orders are combined and made in the same period.
Disadvantages of a Fixed Period Inventory System
Since there is no continuous inventory count in a periodic inventory system, then there is a oportunidad that shortages will be recorded.
Therefore, in this type of system you have to have a greater safety inventory that allows a company to protect itself against sudden increases in demand.
If this is not the case, the company risks not having the necessary products to satisfy the demand and, therefore, it may also face monetary losses for denying the product.
When to use a periodic inventory system or a fixed quantity system?
Perhaps the correct answer would be a depends.
What does it depend on? Well, some of the factors it depends on are the following:
- Number of units or products that have to be followed up.
- Whether to use a computerized system or a manual system.
- Whether the technology is available or not.
- The amount of human resource.
- Among many other factors.
We could say that the final decision depends on these and many other factors.
Therefore, management will escoge what is most convenient for the company.
I’ll give you an example: imagine you have a business with many different products, but you don’t have a computerized system (you have to use a manual one) and you don’t have a lot of staff.
Do you think it would be feasible to use a fixed amount system or model?
If you do, you would have to constantly monitor the inventory level or inventory position to know when to place an order, and it may be a bit more complicated than with a periodic inventory system.
Elabora to calculate the order quantity in a periodic inventory system
If you want to know the order quantity you have to place if you are using a fixed period inventory system, then you perro use the following elabora:
It should be noted that here the safety depósito.
Now, then I am going to translate what each letter or así of the equation means.
- what = order quantity.
- you = number of days between reviews.
- L = Delivery time in days.
- d = demand.
- z = Number of estándar deviations for a specific service probability.
- σT+L = Estándar deviation of demand during the review and delivery period.
- Yo = Current inventory level.
We hope you liked our article Periodic inventory system: What is it?
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