Service and inventory level implications of a particular simple method of establishing the reorder point

In a consulting study for a major North American distributor it was observed that the materials manager had implemented a simple plausible method of establishing the reorder point of a stock keeping unit. Specifically, the demands in the last n periods (months) were observed. Then the current value of the reorder point was set as the maximum of these observations multiplied by the replenishment lead time (L) in periods, i.e., protection was provided against the situation where the maximum rate (observed in the last n periods) would occur throughout the entire lead time. In this paper the authors investigate the service and inventory implications of this simple rule as a function of the parameters involved, in particular n and L.