Reorder point = Lead * Average usage
Safety stock:
The demand for inventory is likely to fluctuate from time to time. In particular, at certain points of time the demand may exceed the anticipated level.
In
other
words,
a
discrepancy
between
the
assumed
(anticipated/expected) and the actual usage rate of inventory is likely to occur in practice. The effect of increased usage and/or slower delivery would be shortage of inventory. That is, the firm would disrupt production schedule and alienate the customers. The firm would, therefore, be will advised to keep a sufficient safety margin by having additional inventory to guard against stock-out situation. Such stocks are called safety stocks. This would act as a buffer/cushion against a possible shortage of inventory.
Safety stock may,
thus, be defined as minimum additional inventory to serve as safety margin/buffer/cushion to meet unanticipated increase in usage resulting from unusually high demand and/or uncontrollable late receipt of incoming inventory.