Little's Law From Factory to Customer: Lowest Landed Cost at a 95 to 99% Service Level

Every day a product spends between your supplier's factory and your customer's dock is inventory someone has to finance. Little's Law turns those days into units and dollars at every stage of the chain. KOMPASS uses it to compare sourcing and freight options on total landed cost, duty included, while holding a service level between 95 and 99 percent. That way a low freight quote or a low unit price never hides a higher total cost.

Little's Law at every stage

In a supply chain, the flow rate is your demand. When sales run at a steady rate, every stage follows the same rule:

The law holds for averages when goods enter and leave each stage at about the same rate. It works the same way on a factory floor, a container on the water, a port terminal, and a distribution center shelf.

The example in this article follows an importer that sells a machined component to manufacturers in the Western U.S. It sells 100 units a day and buys from a factory in China, one 40-foot container of 3,000 units every 30 days.

Two things stand out. Ocean transit is the longest stage, while port and customs is the most variable, and variation is what drives safety stock. The importer also owns 5,577 units, about 56 days of sales, before counting anything on the supplier's floor.

Which Incoterm gives you the advantage?

The dashed line on the map marks the point where this importer takes over the goods. The Incoterm in your purchase order decides where that line sits. It sets who books each leg, who pays for it, and where the risk of loss or damage moves from your supplier to you. The example uses FOB at the origin port, which puts the line between the port and the ocean.

A question for your team: if you compared your lanes side by side today, would you know which Incoterm gives you the advantage on each one, and why?

• EXW (Ex Works). You collect the goods at the supplier's door and take on export clearance and every leg after it. This gives you the most control and the most work, and clearing export in another country is hard to manage from the U.S.
• FCA (Free Carrier) and FOB (Free On Board). The supplier clears export and delivers to your carrier, at its plant or a terminal under FCA, or on board the vessel under FOB. You choose the ocean carrier, and that choice is what option B in the worked example below depends on. For containers, the International Chamber of Commerce recommends FCA, because the supplier hands the container to the terminal days before it is loaded.
• CFR (Cost and Freight) and CIF (Cost, Insurance and Freight). The supplier books and pays the ocean freight, and the risk still passes to you once the goods are on board at origin. You carry the risk on a ship your supplier chose, and the schedule reliability that drives your safety stock sits in your supplier's hands.
• DAP (Delivered at Place) and DDP (Delivered Duty Paid). The supplier delivers to your door. Under DAP you clear customs and pay the duty. Under DDP the supplier does both as importer of record. These rules ask the least of you and give you the least control, and the supplier builds its freight cost and markup into one unit price.

An Incoterm sets cost and risk. Payment timing and the transfer of title come from your payment terms and the sales contract.

More control means more responsibility

Moving up the chart toward EXW puts the carrier choice and the freight rate in your hands. It also hands you the work that comes with them. Someone has to book space, file the Importer Security Filing at least 24 hours before the container is loaded, file the customs entry, place cargo insurance, and manage claims when something goes wrong. A late or wrong Importer Security Filing can cost up to $5,000 per violation. Each of those steps also moves your lead time and its variation, and those two numbers set your safety stock.

Option B in the worked example below saves about $19,600 a year because the importer picks a more reliable carrier and files the customs entry before arrival. Under CFR or CIF, the supplier picks the ship, and most of that saving stays out of reach.

Holding a 99% service level

Cycle service level is the probability that stock covers demand until the next replenishment arrives. KOMPASS sets it item by item, between 95 and 99 percent. Items that carry most of a client's revenue, where a stockout stops a customer's line or loses an order, get 99 percent. Slower movers sit closer to 95 percent. The example uses 99 percent, which with 12 orders a year means one expected stockout about every eight years.

Safety stock is what buys that protection:

Lead time variation supplies 360,000 of the 403,200 under the square root, about 89 percent. For this importer, the safety stock problem is mostly a port and customs problem.

What each service level costs

Option A from the example, valued at the $120 purchase price with a 25 percent annual carrying rate.

Each step up costs more than the one before. Going from 99 to 99.9 percent adds 485 units, more than the 432 units it takes to go from 95 to 99 percent. That makes service level a business decision set item by item. For high-revenue items, 99 percent balances the cost of safety stock against the cost of a lost order. For slow movers, 95 percent frees cash with little revenue at risk.

Total landed cost includes the inventory

A freight quote covers one line of this formula, and a supplier quote covers another. Duty depends on the country of origin and is often the largest line after the price itself. The carrying cost line is where lead time and variation show up, and it moves with every day you add to or remove from the chain.

Worked example: three ways to supply the same customers

KOMPASS priced three options for the importer, all at a 99 percent service level. The part is an industrial component outside the Section 232 metals tariffs.

• A. China, standard ocean. The current setup: a 48-day replenishment lead time with a 6-day standard deviation, $8,500 per container delivered to the distribution center, and 40 percent duty. That duty is a 2.5 percent base rate, 25 percent under Section 301 List 3, and the 12.5 percent Section 301 forced-labor duty in effect since July 24, 2026.
• B. China, reliable service. Same supplier, price, and duty. A carrier with stronger schedule reliability, a customs entry filed before arrival, and booked drayage appointments cut port time from 5 days to 2 and halve the variation. Freight rises to $9,200 per container.
• C. Mexico supplier, truck. A 12 percent higher unit price, a 14-day lead time with a 1.5-day standard deviation, and a 1,400-unit truckload every 14 days at $4,500 per truck. The part qualifies under USMCA, so it enters duty-free and is exempt from the 10 percent Section 301 duty on Mexico.

Prices, freight, and lead times are illustrative. Duty rates reflect U.S. tariffs in force in October 2026 for a part like this one. Your rate depends on the HTS classification and country of origin, so confirm it with your customs broker.

Inventory at a 99% service level

Total landed cost per unit

Within China, option B beats option A. It pays $0.23 more per unit in freight, about $8,500 a year, and saves $28,100 a year in carrying cost. Total landed cost falls by $0.54 per unit, about $19,600 a year, and $112,400 of cash comes out of inventory at the same 99 percent service level. That gain comes entirely from Little's Law: fewer days in the chain and steadier lead times.

Option C wins overall. At $139.30 per unit, it costs $35.58 less than option B, about $1.3 million a year. Duty drives most of the gap, and the shorter chain adds to it: option C ties up $246,700 in inventory against $669,200 for option A. Mexico would still win with a price premium of up to about 41 percent. If the part fell outside USMCA rules of origin, it would pay 12.5 percent duty (a 2.5 percent base rate plus the 10 percent Section 301 duty) and land at about $156 per unit, still below China.

How KOMPASS optimizes the chain

1. Map the chain. List every stage from the supplier's floor to your customer's dock, with the average days and the variation in days at each one.
2. Convert days to inventory. Little's Law gives the units and dollars in each stage and shows where the most cash sits.
3. Set the service level by item, between 95 and 99 percent: 99 percent for the items that carry most of your revenue, closer to 95 percent for slow movers.
4. Size safety stock from demand variation and lead time variation, and find the stage that drives it.
5. Price every option at total landed cost at the same service level. That includes duty for the exact tariff classification and country of origin, and the carrying cost of in-transit, cycle, and safety stock.
6. Run the winner. As a licensed freight broker, KOMPASS books the freight and tracks transit and port time, so the lead time the plan depends on is the lead time you get.
7. Review each quarter, or sooner when freight or duty rates change.

KPIs to track

• Total landed cost per unit: by item and by lane
• Cycle service level and fill rate: by item class
• Days of inventory by stage: in transit, at the port, in the distribution center
• Lead time: average and standard deviation, by lane
• Duty per unit: by part and country of origin
• Port dwell: days from vessel arrival to drayage pickup
• Cash in inventory: units owned × unit value

Common mistakes

• Choosing freight on rate alone. The cheapest quote can carry the most inventory.
• Planning with average lead time only. Variation drives safety stock, and in this example it drives 89 percent of it.
• Counting only the stock in the warehouse. In-transit stock is yours once you have paid for it.
• Using one service level for every item. Slow movers held at 99 percent tie up cash with little revenue at risk.
• Assuming Mexico means duty-free. Only goods that meet USMCA rules of origin, with the preference claimed, enter at 0 percent. Section 232 metals tariffs apply either way.
• Comparing options at different service levels. A cheaper option that runs out more often makes your customers a different promise.

Related: Little's Law and Lead Time: Where Your Operation Is Leaking Cash · Economic Order Quantity for Importers: How Much to Order