Determining the Reorder Point, Protection Level and Lead Time Demand of an Inventory Item

It is obvious that an inventory item's lead time demand is affected by the length of the lead time as well as the actual demand on each day during the lead time. In a situation where the lead time and the daily demand are both stochastic, the probability distribution of an item's lead time demand is then determined by the probability distributions of the item's daily demand and lead time. This article presents a computationally simple method for determining the lead time demand's probability distribution from estimations of the item's daily demand and lead time probability distributions; no restriction is placed on the distribution forms of the daily demand, the lead time and the lead time demand. After obtaining the lead time demand distribution, this article illustrates the computation of “reorder points” and “protection levels” for an inventory item.