In a continuous-review inventory system, the reorder point (ROP) is equal to which of the following?

• A. Demand during lead time plus safety stock
• B. Demand during the review period
• C. Lead time multiplied by average demand
• D. Safety stock only

Answer: (A)

In a continuous-review system, you trigger a replenishment when your inventory position hits a level that covers what you expect to be used during the lead time plus a buffer for uncertainty. That means the reorder point equals the demand you anticipate during the lead time plus safety stock. The demand during lead time accounts for the average consumption while you wait for the new order to arrive, and safety stock guards against variability in demand and/or lead time so you don’t run out before the new stock comes in.

If you used only the average demand during lead time, you’d risk stockouts during periods of higher demand or longer lead times. If you used the demand during a fixed review period, that concept applies to periodic review systems, not continuous review. If you relied on safety stock alone, you wouldn’t have enough inventory to cover normal expected consumption during lead time.