This paper considers the number of defective items in a lot to be a random variable and derives a modified (s, Q) model with stochastic demand and constant lead time. The paper develops explicit results for the case of exponential and uniform demand during lead time when the number of defective items in a lot follows a binomial process. It also investigates the effect of lower setup costs on the operating characteristics of the model. A numerical example is given and sensitivity analysis is performed.