Where this applies
A simple continuous-review example for one SKU. Seasonal, intermittent, perishable or constrained supply needs a more tailored policy; this page does not calculate an optimized service level.
Gather first
- Daily demand including lost-sales or backorder signals
- Order-to-usable-receipt lead times, including receiving and inspection
- Usable stock, open orders, backorders and the reservation convention
A repeatable method
Use one time unit
If demand is measured per business day, lead time must use compatible business days. Include the time between arrival and availability to fulfill an order. Exclude quarantined or unusable stock from usable on-hand.
Define inventory position
For this guide, inventory position equals usable on-hand plus confirmed on-order minus backorders. If your system also subtracts reservations, define which are already included in demand so you do not subtract the same requirement twice.
Make the buffer explicit
Set aside a named safety-stock allowance rather than inflating every demand and lead-time input. Test plausible shortages and delays. A fixed allowance demonstrates the calculation but does not establish a statistical service level.
Check the policy against real outcomes
Track shortage days, aged stock and expedite spend together. Revisit the assumptions after a supplier delay or demand shift. Lower inventory is not an improvement if the same decision creates more shortages or unusable stock.
Trigger on position, not the shelf
Assumptions: Demand is 20 units per day; replenishment lead time is 10 days; safety stock is an assumed 60 units. Continuous review, no minimum-order constraint, and on-order supply is expected within the relevant horizon.
- Reorder point = (20 × 10) + 60 = 260 units.
- Usable on-hand 170 + confirmed on-order 120 − backorders 20 = 270 units of inventory position.
- 270 is above 260, so this simplified policy does not trigger another order yet.
- If 30 units are consumed with no other changes, position is 240 and the threshold is crossed.
What this means: A 170-unit shelf count alone would give a different signal. Check arrival dates as well: an overdue open order should not reassure you when stock will run out before it arrives. The order quantity is a separate decision.
Common mistakes
- Safety stock is not the same as the reorder quantity.
- An average lead time can hide a long tail; inspect delays rather than treating the average as a promise.
Questions worth asking
Does this guarantee a particular fill rate?
No. The example chooses a buffer rather than estimating it from a demand and lead-time distribution.
Can I use this for weekly review?
Not unchanged. Periodic review must also cover the time until the next review. Test a policy designed for that review cadence.
Sources, dates and limits
The linked primary sources support the specific concepts described below. The examples and decision checklists are original illustrative analysis, not figures supplied or endorsed by these organizations. A check date is not a claim that a rule, price or contract will remain unchanged.
- NC State: Safety Stock Analysis, Inventory Management Models
Published 2011-01-28 · Checked 2026-11-05
Foundational relationship between lead-time demand, uncertainty and safety stock. Historical teaching material, not a recommended service level.
Use the current source, your actual shipment documents and qualified advice where needed. This guide does not book freight, settle a dispute or determine a legal obligation.