Whenever demand for a single item can be categorised into classes of different priorty, an inventory rationing policy should be considered. In this paper we analyse a continuous review (s, Q) model with lost sales and two demand classes. A so‐called critical level policy is applied to ration the inventory among the two demand classes. With this policy, low‐priority demand is rejected in anticipation of future high‐priority demand whenever the inventory level is at or below a prespecified critical level. For Poisson demand and deterministic lead times, we present an exact formulation of the average inventory cost. A simple optimisation procedure is presented, and in a numerical study we compare the optimal rationing policy with a policy where no distinction between the demand classes is made. The benefit of the rationing policy is investigated for various cases and the results show that significant cost reductions can be obtained.
