SAFETY STOCK ANALYSIS: Inventory Management Models : A Tutorial

SAFETY STOCK ANALYSIS

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

p. Safety Stock
What Happens when either Demand or Lead Time Varies?
What is the Chance of a Stockout?
EXAMPLE
Finding Z

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
= lead time

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:

h2. What is the Chance of a Stockout?

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