Describe the two types of ordering policies and the impact each has on safety inventory

Question

What will be an ideal response?

Answer 1

Answer: A replenishment policy consists of decisions regarding when to reorder and how much to reorder. These decisions determine the cycle and safety inventories along with the fr and the CSL. There are several forms that replenishment policies may take. We restrict attention to two instances:
1. Continuous review: Inventory is continuously tracked and an order for a lot size Q is placed when the inventory declines to the reorder point (ROP). The time between orders may fluctuate given variable demand. When using a continuous review policy, a manager has to account only for the uncertainty of demand during the lead time (L).
2. Periodic review: Inventory status is checked at regular periodic intervals and an order is placed to raise the inventory level to a specified threshold. In this case, the time between orders is fixed. The size of each order, however, can fluctuate given variable demand. Periodic review replenishment policies require more safety inventory than continuous review policies for the same lead time and level of product availability, because the safety inventory has to cover for demand uncertainty over the lead time and the review interval (L + T). Periodic review policies are simpler to implement for retailers because they do not require that the retailer have the capability of continuously monitoring inventory. Given that higher uncertainty must be accounted for, periodic review policies will require a higher level of safety inventory.