# Inventory Management for Retail — Periodic Review Policy

Implement inventory management rules based on a periodic review policy to reduce the number of stores replenishments.

Implement inventory management rules based on a periodic review policy to reduce the number of stores replenishments

*Article originally published on Medium. *

### Objective

Design inventory management rules that ** minimize the number of replenishments **and meet

**.**

**stores demand**### Introduction

For most retailers, inventory management systems take a ** fixed**,

**approach to forecast and**

**rule-based****orders management.**

**replenishment**The objective is to build a ** replenishment policy **that will minimize

**,**

**ordering****and**

**holding****costs.**

**shortage**In a previous article, we have built a simulation model based on a ** continuous review inventory policy, **assuming a

**of the demand.**

**normal distribution**However, this kind of policy can be ** inefficient **when you handle

**that may have**

**a large portfolio of items****.**

**different replenishment cycle lengths**In this article, we will improve this model and implement a** periodic review policy** with Python to limit the

**.**

**number of replenishment**s💌 New articles straight in your inbox for free: __Newsletter__

**SUMMARY**

**I. Scenario**1. Problem Statement

*As an Inventory Manager of a mid-size retail chain, you are in charge of setting the replenishment quantity in the ERP.*2. Limits of the continuous review policy

*What is the impact a continuous review policy on the number of replenishments when you handle several hundred SKUs?*

**II. Periodic Review Policy: Order-Up-To-Level (R, S)**1. Introduction of the Inventory Policy

2. Definition of the Safety Stock

3. How do you define k?

**III. Example of Replenishment Policies**

**IV. Conclusion**## I. Scenario

### 1. Inventory Management for Retail

As an ** Inventory Manager** of a mid-size retail chain, you are in charge of setting the

**.**

**replenishment quantity in the ERP**Because your ** warehouse operational manager** is complaining about the

**, you start to challenge the**

**orders frequencies****, especially for the**

**replenishment rules implemented in the ERP****.**

**fast runners**Previously we have implemented several inventory rules based on ** continuous review policies**.

At each ** time t** we check the inventory on hand (IOH):

**Example for 1 SKU**

We need ** 27 replenishment orders** per year.

QuestionHow frequently do you need to order if you manage?2,294 SKUs

*You can find the source code with dummy data in my Github repository: Link*### 2. Limits of the continuous review policies

We suppose that we only have 365 days of sales

(STORE_1, … STORE_10)**10 stores**(FOOD_GROCERY)**1 product family**unique SKU (STORE ID + PRODUCT FAMILY + ITEM CODE)**2,294**

**Simulation 1**

Let’s implement the continuous review policy for **1 SKU**

- SKU: STORE_1-FOOD_GROCERY_009
- Safety stock designed with k = 3

(3 times the standard deviation of the demand distribution) - Order Quantity: Q = 3 x Average_Annual_Sales

Commentsin the first 100 days18 replenishments

**Simulation 2**

What if we have now ** 10 SKUs** to manage?

Commentsin the first 100 days54 replenishments

**Simulation 3**

What if we have ** 100 SKUs** to manage?

Commentsin the first 100 days with less than 10 days without orders935replenishments

**Simulation 4**

What if we have ** 2,294 SKUs** to manage?

Commentsin the first 100 days (less than 10 days without orders)19,267 replenishments

With this method, the number of replenishments is exploding when you have a large portfolio.

**Solution**

We will build a replenishment policy using ** periodic reviews**.

## II. Periodic Review Policy: Order-Up-To-Level

1. Introduction of the Inventory Policy

To solve this issue of replenishments frequency, let us introduce a periodic review policy (s, Q)

- At each period R, the inventory on hand
level will be reviewed**(IOH)** - Stores will order to reach an inventory level of S

To simplify the comprehension, let’s introduce some notations:

### 2. Definition of the Order-Up-To-Level S

How to calculate the level S:

The level S is calculated to set the inventory at a level that will cover the need during the review period and the replenishment lead time.

### 3. How do you define k?

Your performance metrics will be directly impacted by the safety stock level

- You fix a target for any of the two metrics
*(e.g: I want the Cycle Service Level to be 95%)* - You calculate k to reach this target based on the distribution of your demand (Normal, Poisson)
- You fix your reorder point

**Code**

## III. Example of replenishment policies

### 1. Example with SKU: STORE_1-FOOD_GROCERY_009

Review Period: R = 10 days

k = 1

Comments10 replenishmentsvs.in the first 100 days with 0 stock-outs18 replenishments

### 2. How many replenishments if you handle the full portfolio?

Comments13,986replenishmentsvs.in the first 100 days with only 10 days of replenishments19,267 replenishments

## IV. Conclusion

After implementing a periodic review policy you will reduce your operating costs by

**Limiting the time windows of replenishments**

This will optimize your resources for inventory management, order preparation and transportation management.**Reducing the number of replenishments**

This will increase the quantity per replenishment and provide opportunities for shipment consolidations for stores delivered at the same time.

### About Me

Let’s connect on Linkedin and Twitter, I am a Supply Chain Engineer that is using data analytics to improve logistics operations and reduce costs.

## References

[1] — Supply Chain Science, Wallace J. Hopp