Periodic review system: Meaning, Criticisms & Real-World Uses

What Is Periodic Review System?

A periodic review system is an inventory management strategy where the status of inventory levels is checked at fixed, predetermined intervals, rather than continuously. At each review point, if the inventory level has fallen below a certain threshold, an order is placed to bring the stock up to a maximum target level. This approach contrasts with systems that trigger an order as soon as stock hits a reorder point. While fundamentally rooted in inventory management and supply chain operations, the principles of a periodic review system extend to broader financial applications, such as scheduled portfolio rebalancing or regularly reviewing a financial planning strategy.

History and Origin

The evolution of inventory management, which includes the development of the periodic review system, is closely tied to the growth of commerce and industry. In ancient times, merchants relied on manual methods like handwritten logs and physical counts to track goods⁵. The Industrial Revolution significantly increased production efficiency and the complexity of supply chains, driving the need for more systematic approaches to cost control and inventory oversight.

Early mechanical systems, such as punch cards developed in the late 19th and early 20th centuries, began to automate aspects of inventory tracking. For instance, Harvard University introduced a punch card-based checkout and inventory control design in the 1930s⁴. These early innovations paved the way for more structured inventory control methods, including the formalization of both periodic and continuous review systems. The simplicity and lower monitoring costs associated with periodic reviews made them a practical choice for many businesses, especially before the widespread adoption of real-time digital tracking technologies.

Key Takeaways

A periodic review system involves checking inventory or asset levels at fixed time intervals.
Orders or adjustments are typically made to bring the quantity up to a predetermined target level at each review.
This system is often less expensive to implement than continuous monitoring systems due to reduced tracking requirements.
It is widely applied in inventory control but also conceptually in financial areas like portfolio monitoring and rebalancing.
A key challenge is the risk of stockouts or significant deviations between review periods.

Formula and Calculation

The periodic review system primarily relies on setting a "target inventory level" or "order-up-to level" (M) and then, at each review period, ordering enough to reach that target. The order quantity (Q) is determined by the difference between the target level and the current inventory on hand (I) plus any outstanding orders (O).

The order quantity can be calculated as:

Q = M - (I + O)

Where:

(Q) = Quantity to order
(M) = Target inventory level (Order-up-to level)
(I) = Inventory on hand at the time of review
(O) = Quantity of items already ordered but not yet received (on order)

The target inventory level ((M)) itself is typically calculated to cover expected demand during the review period plus the lead time, plus an allowance for safety stock to guard against variability in demand or lead time. Accurate forecasting is critical for setting an effective target level.

Interpreting the Periodic Review System

Interpreting a periodic review system involves understanding its core principle: proactive planning over reactive response. Since inventory levels are only checked at set times, the system assumes that demand and lead times are reasonably predictable, or that the cost of continuous monitoring outweighs the benefits. The frequency of review directly impacts the system's responsiveness to unexpected changes. A longer review period means lower monitoring cost control but a higher risk of large inventory fluctuations or stockouts between reviews. Conversely, more frequent reviews increase monitoring costs but reduce the risk of significant deviations from target levels, enabling a more stable supply chain. The effectiveness of a periodic review system is heavily reliant on the accuracy of demand forecasting and the chosen review interval.

Hypothetical Example

Consider a small investment advisory firm that uses a periodic review system for its clients' portfolios. They decide to review and rebalance all client asset allocations quarterly.

At the end of Q1, they review Client A's portfolio. Client A's target allocation is 60% stocks and 40% bonds.

Current Portfolio Value: $100,000
Target Stock Allocation: $60,000
Target Bond Allocation: $40,000

Upon review, they find:

Current Stocks: $65,000 (65%)
Current Bonds: $35,000 (35%)

Using the periodic review system, the firm identifies the drift from the target. To rebalance:

They sell $5,000 worth of stocks ($65,000 - $60,000).
They buy $5,000 worth of bonds ($40,000 - $35,000).

After these transactions, the portfolio is restored to its 60/40 target, aligning with the client's desired risk management profile. This process is repeated at the end of each quarter, ensuring the portfolio consistently adheres to its intended investment strategy.

Practical Applications

While often associated with physical inventory, the periodic review system has several practical applications in finance and business:

Portfolio Rebalancing: Investors frequently use a periodic review system to maintain their desired asset allocation. This involves reviewing the portfolio at set intervals (e.g., quarterly or annually) and adjusting holdings back to target percentages. This approach helps manage risk management and ensures the portfolio remains aligned with long-term goals.
Budgeting and Financial Planning: Businesses and individuals often review their budgets and financial plans on a periodic basis (e.g., monthly, quarterly, or annually). This allows for assessment of actual cash flow against projections and adjustments to spending or savings plans. Strategic financial planning heavily relies on such scheduled reviews.
Compliance and Regulatory Checks: Many industries require periodic reviews of compliance protocols, internal controls, or financial reporting systems to ensure adherence to regulations. This might involve scheduled audits or internal checks to identify and rectify any deviations.
Investment Monitoring: Beyond rebalancing, individual investors or financial advisors might implement a periodic review system to monitor the overall performance of investments, assess market trends, and identify potential opportunities or risks. Regular reviews are considered best practices for monitoring and adjusting investments³.

Limitations and Criticisms

Despite its advantages, the periodic review system has notable limitations. A primary drawback is the potential for significant discrepancies in inventory levels or asset values between review periods. If demand for a product surges unexpectedly, or if market conditions drastically change for an investment, a periodic review system might not detect the issue until the next scheduled check, potentially leading to stockouts, missed opportunities, or increased holding costs for excess inventory².

For inventory, this can mean losing sales or incurring expedited shipping fees. In portfolio management, a rapidly changing market could cause a portfolio's asset allocation to drift significantly from its target, exposing the investor to unintended risk management levels before the next review. The system also requires more safety stock compared to continuous systems to buffer against demand uncertainty during the combined review and lead time, which can increase holding costs ¹. This "blind spot" between reviews is a significant criticism, particularly in volatile environments or for items with unpredictable demand.

Periodic Review System vs. Continuous Review System

The periodic review system and the continuous review system are two fundamental approaches to managing inventory and monitoring financial assets, primarily differing in their monitoring frequency and reorder triggers.

Feature	Periodic Review System	Continuous Review System
Monitoring	At fixed, predetermined intervals (e.g., weekly, monthly, quarterly).	Continuously, often in real-time.
Order Trigger	Order placed at each review if inventory is below target.	Order placed when inventory drops to a predefined reorder point.
Order Quantity	Variable, brings inventory up to a target level.	Fixed quantity, often the economic order quantity.
Information Needs	Less demanding, requires inventory status only at review.	High, requires constant tracking of inventory levels.
Cost	Generally lower implementation and monitoring costs.	Higher implementation and monitoring costs (e.g., barcode scanners, advanced software).
Risk of Stockouts	Higher, especially for unpredictable demand, due to blind spots between reviews.	Lower, as orders are triggered immediately when stock is low.
Safety Stock	Typically requires more safety stock.	Typically requires less safety stock.

While the periodic review system offers simplicity and lower monitoring expenses, the continuous review system provides greater control and responsiveness, making it more suitable for high-value items or environments with volatile demand. The choice between the two often depends on the specific nature of the items being managed, the costs involved, and the acceptable level of risk management.

FAQs

How often should a periodic review be conducted?

The frequency of a periodic review depends on the specific context, such as the volatility of the asset or product, the cost of monitoring, and the acceptable level of risk management. For investment portfolios, quarterly or annually is common. For inventory, it could be weekly or monthly, depending on demand patterns and lead times.

Is the periodic review system suitable for all types of inventory or investments?

No, it is generally less suitable for high-value items, items with highly unpredictable demand, or investments in volatile markets where real-time monitoring is critical. It performs best for lower-value items, those with stable demand, or investment strategy where frequent adjustments are unnecessary or costly.

Does a periodic review system save money?

A periodic review system can save money on monitoring and administrative costs because it does not require continuous tracking. However, it may indirectly lead to higher holding costs due to the need for more safety stock, or lost sales if stockouts occur between reviews. The overall cost-effectiveness depends on balancing these factors.

How does demand forecasting relate to a periodic review system?

Forecasting is crucial for a periodic review system because the order-up-to level and the quantity ordered are based on anticipated demand during the review period and lead time. Accurate forecasts help minimize the risk of stockouts or excess inventory.

Can a periodic review system be automated?

Yes, modern inventory management and financial software systems can automate periodic reviews. This involves setting up scheduled checks and automated alerts or order generation based on predefined rules, reducing manual effort and improving consistency.