Inventory Management Strategies: Understanding Periodic and Continuous Review

Effective inventory management is a cornerstone of profitable operations and customer satisfaction. Among the most important decisions businesses face is choosing between periodic and continuous inventory review policies. This guide explains these two core strategies, their pros and cons, and how to select the best fit for your operations.

Periodic Review Policy

In a Periodic Review system, inventory levels are checked at fixed intervals (e.g. weekly, biweekly, monthly), and orders are placed to bring stock up to a predefined target level.

Example: A company reviews stock every Monday and orders enough to reach a maximum inventory level, regardless of how much was consumed during the prior week.

Pros

• Simplified scheduling: Easy to coordinate with regular supplier deliveries, production runs, or shipment consolidation.

• Lower monitoring effort: Inventory is only checked at set intervals, reducing administrative workload.

• Works well for low-value or low-demand items: When stockouts are less critical, periodic review can be sufficient

Cons

• Higher safety stock requirements: Because inventory isn't monitored continuously, more buffer stock is needed to protect against potential demand spikes between replenishments.

Continuous Review Policy

A Continuous Review system (also known as a reorder point system) continuously tracks inventory levels. When stock falls below a predetermined reorder point, an order is triggered immediately .

Example: A company sets a reorder point of 50 units. As soon as inventory drops to 50, an order is placed to replenish stock.

Pros

• Lower safety stock requirements: Because replenishment orders can be placed as soon as stock levels dip too low, less buffer stock is needed for potential demand spikes.

• Faster reaction time: Allows for immediate response to demand changes, reducing the risk of stockouts

Cons

• Higher monitoring and system costs: Requires more sophisticated tracking systems or technology integration

• Complexity: Administrative overhead grows quickly as the number of managed SKUs increases

• Less coordination-friendly: Since orders can be triggered at any time, it is harder to coordinate with supplier schedules or consolidate shipments

How to Choose the Right Policy for your Business

The optimal inventory policy depends on your operational goals, item characteristics, supplier requirements, and available systems. Here's how to assess your needs:

Factor	Favor Periodic Review	Favor Continuous Review
SKU Volume	High	Low to Medium
Demand Variability	Low	High
Product Value	Low	High
Stockout Impact	Tolerable	Critical
Technology Readiness	Low	High
Supplier Flexibility	Low	High

At the end of the day, it really comes down to a cost-benefit analysis between the cost of additional safety stock needed for the periodic review policy versus the cost of additional administrative and technical overhead for the continuous review policy.

Final Thoughts

There is no one-size-fits-all solution in inventory management. The key is to match your policy to the realities of your business in order to balance control with complexity. Beyond traditional Periodic or Continuous Review models, numerous customized variations can be developed to address specific business complexities. Factors like minimum order quantities (MOQs), case pack sizes, purchasing commitments, and other nuanced considerations often warrant tailored inventory policies.

For business with sufficiently complex operations, a customized inventory optimization model can significantly enhance operational efficiency, reduce costs, and improve service levels resulting in profit increases far exceeding the initial investment.

Interested in learning how a custom inventory model can work for your organization? Contact us for a free consultation.