What This Calculator Does
Most raw material stock policies are set by intuition — "we keep three weeks' worth" — without formal analysis of the economic trade-off between holding cost and stockout risk.
This calculator finds the economically optimal service level: the point where the marginal cost of holding one more unit of safety stock exactly equals the marginal reduction in expected stockout cost.
The result is a reorder point, safety stock level, and order quantity that minimises total inventory cost whilst achieving a defined service level target.
Input Parameters
Demand Characteristics
| Parameter | Description |
|---|---|
| Average demand rate | Units consumed per day/week under normal conditions |
| Demand variability (CV) | Coefficient of variation of demand — how predictable consumption is |
| Demand distribution | Shape of demand distribution (typically normal for finished goods, Poisson for slow movers) |
Lead Time Characteristics
| Parameter | Description |
|---|---|
| Average lead time | Mean time from order placement to receipt |
| Lead time variability | Standard deviation of lead time — supplier reliability |
Cost Parameters
| Parameter | Typical Range | Description |
|---|---|---|
| Holding cost | 2–5% of unit cost per year | Warehouse space, handling, insurance, obsolescence risk. Does not include capital cost of the stock itself. |
| Ordering cost | Varies by supplier | Cost of placing and receiving one purchase order |
| Stockout cost | 10–50× unit cost per event | Lost margin + expediting cost + customer relationship damage. This is almost always underestimated. |
Safety Stock Formula
Safety stock is calculated using the combined variability of demand during lead time:
Where:
- z = service level z-score (e.g., 1.65 for 95%, 2.33 for 99%)
- L̄ = average lead time
- σ_d = standard deviation of daily demand
- d̄ = average daily demand
- σ_L = standard deviation of lead time
The reorder point is then: ROP = d̄ × L̄ + Safety Stock
Calculator
Enter your parameters below to find the economically optimal service level.
Demand Characteristics
Lead Time
Order & Cost Parameters
Optimise your stock policy
majaco can apply this methodology to your full raw material portfolio — identifying which items are over-stocked and which are dangerously under-protected.
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