What the last points cost.
Ninety-nine percent sounds like one point more than ninety-eight. In stock it costs 4.6 times the step from 90% to 91%: the tail of the normal curve thins, and each point near the top needs more safety stock than the one before. Put in your demand, how much it varies and the lead time, then push the service level toward 100%.
An example: 100 units a day with a standard deviation of 20, a lead time of 7 days and a 95% service level.
- Safety stock
- 88 units
- Reorder point
- 788 units
One point more, to 96%, costs 5 more units.
z = Φ⁻¹(0.95) = 1.645
Safety stock = z × σ × √L = 1.645 × 20 × √7 = 87.04, rounded up to 88
Reorder point = d × L + safety stock = 100 × 7 + 88 = 788
The textbook case: demand is normal and independent from one day to the next, the lead time is fixed, and the service level is the chance of not running out while an order is on its way. Any period works in place of days, as long as demand and lead time use the same one.