When you create or work with products or materials, you must have a determined level of inventory in the warehouse to prevent breaking stock. If your stock breaks, you would not be able to serve customers and, consequently, you could lose them. For this reason, it is advisable to create a model that fits your demand and also create an inventory ordering system that fits your model. You should avoid having more inventory than necessary stored, which would increase the costs of storage, or to have less inventory than necessary, which could lead to breaking stock.
The reorder point method and the periodic review method can help us to achieve a level of effective and efficient inventory. These methods are explained below.
The reorder point method (ROP) is based on the request of some products to your supplier when the available quantity in your warehouse is below a certain level. As it is shown in the Figure 1, the quantity requested should cover the period from the reception of an order until it returns to receive another order. We should take into account the demand and the standard deviation to calculate the reorder point (R) because we should have enough product in stock to cover the period L.
Figure 1. Reorder point method graphic. Source: <http://www.infosysblogs.com/supply-chain/2013/01/rop_using_apo_ctm.html>
As it is shown in Figure 2, periodic review method is based on the periodic review of the inventory. When we check the inventory level we see if it is below the determined level. If it is below the level, we request product, if it is not below the level, we forget the inventory until the next review.
Figure 2. Periodic review method graphic. Source: <http://www.supplychainmusings.com/2008/05/replenishment-policies-and-inventory.html>
For example, if you work in a hospital pharmacy you need to have always the drugs that the patients need but you have a limited space so you have to control the inventory. You can apply the periodic review and check the inventory one time per day, but the best way to control the inventory is to have a reorder point because, thanks to the barcodes, the number of drugs in stock is always controlled and you can request more when the stock arrives to a certain level thanks to databases.