# SAFETY STOCK ANALYSIS: Inventory Management Models : A Tutorial

## SAFETY STOCK ANALYSIS

### EOQ tells us HOW MUCH to order…but WHEN should we order?

h2. Safety Stock

When both lead time & demand are constant, you know exactly what the reorder point is …

• Under these assumptions:

Reorder point = demand during lead time

• Where

= demand per time period

## What Happens when either Demand or Lead Time Varies?

• Variances are caused by changes in demand rates and lead times.

• Additional inventory beyond amount needed to meet “average” demand during lead time
• Protect against uncertainties in demand or lead time
• Balance the costs of stocking out against the cost of holding extra inventory
• When holding safety stock (SS), the average inventory level is:

• Shown graphically:

Recalculating the reorder point to include safety stock

GRAPHIC

h2. EXAMPLE

### Calculating averages and variances of demand and lead time using historical data

Historical data for 10 weeks of demand, as well as 8 previous orders

h2. Finding Z

• Z = number of standard deviations above average demand during lead time
• The higher z is:
• >> The lower the risk of stocking out
• >> The higher the average inventory level
• Typical choices for Z:
• Z = 1.29 >> 90% cycle service level
• Z = 1.65 >> 95% cycle service level
• Z = 2.33 >> 99% cycle service level
• Cycle service level:
• Once the reorder is placed, the probability that stocks will be depleted before the new order arrives
• Categories: