is placed at that time as to meet the expected demand until the next order. In this case, the safety stock is calculated considering the demand and supply variability risks during this period plus the replenishment lead time. If the inventory policy is continuous policy (such as an order point-order quantity policy or an order point-order up to policy) the inventory level is continuously monitored and orders are placed with freedom of time. In this case, safety stock is calculated considering the risk of only the replenishment lead time. If applied correctly, continuous inventory policies can lead to smaller safety stock whilst ensuring higher service levels, in line with lean processes and more efficient overall business management. However, continuous inventory policies are much harder to implement, so most of the organisations using traditional planning processes and tools opt for periodic inventory policy. Methods for calculating safety stocks Reorder point method with demand and lead time uncertainty for type I service A commonly used approach calculates the safety stock based on the following factors: Demand is the number of items consumed by customers, usually a succession of independent random variables. Lead time is the delay between the time the reorder point (inventory level which initiates an order) is reached and renewed availability. Service level is the desired probability of meeting demand during the lead time without a stockout. If the service level is increased, the required safety stock increases, as well. Forecast error is an estimate of how far actual demand may be from forecast demand. Assuming that demand during successive unit time periods are independent and identically distributed random variables drawn from a normal distribution, the safety stock can be calculated as:where, is the service level, and is the inverse distribution function of a standard normal distribution with cumulative probability ; for example, =1.65 for 95% service level. The service level can be easily calculated in Excel by typing in the formula =normsinv(probability%). For eg entering =normsinv(95%) will return 1.65 as the answer. and are the mean and standard deviation of lead time. and are the mean and standard deviation of demand in each unit time period. The reorder point can then be calculated as:The first term in the ROP formula is the average demand during the lead time. The second term is the safety stock. If the lead time is deterministic, i.e. , then the ROP formula is simplified