The formulas
- Lead time demand sigma = sqrt(L x sd_d^2 + d^2 x sd_L^2)
- Safety stock = z x sigma
- Reorder point = d x L + safety stock
How it works
Safety stock covers demand above average during the wait for a delivery. The cycle service level is the share of order cycles that end without a stockout. A higher level needs a larger z value and more stock, and the stock rises faster as you approach 100 percent.
When lead time is fixed, leave its standard deviation blank and the formula reduces to z x sd_d x sqrt(L). Daily demand and lead time must use the same time unit. Measure the standard deviation from recent daily sales, not from monthly totals.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
What z values are used?
One-tailed standard normal values: 1.2816 for 90%, 1.6449 for 95%, 1.96 for 97.5%, 2.3263 for 99%, 2.5758 for 99.5%.
Is service level the same as fill rate?
No. Cycle service level counts cycles without a stockout. Fill rate counts the share of units shipped from stock.
When do I recheck these numbers?
When demand or supplier lead time shifts, and at least each season for seasonal items.
Formulas on this page are the standard definitions.
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