Safety stock in inventory models

1. Inventory and safety stock
● Describe the stock that is kept on hand
● Reduce the chance of a stockout
● You can also say buffer stock
● Helpfull for uncertain demand

2. Safety stock
● Too much safety stock = high holding costs
● Too less safety stock = lost sales
● Main goal is to absorb the variability of the
demand
● Improve the customer service level

3. Reorder point
● Without safety stock
ROP= d x L
d= Daily demand L=Order lead time
● With safety stock
ROP= d x L + ss
ss= safety stock

6. Example
● Reorder point = 50 units
● Holding costs per unit per year= 5 €
● Stockout costs per unit = 40 €
● Number of orders per year = 6
● Probability of stockout
● 0 units of safety stock = 20%
10 units of safety stock = 10%
20 units of safety stock = 0%

7. Solution
Safety stock Additional holding
cost
Stockout cost Total cost
20 (20)*(5€)=100€ 0 100 €
10 (10)*(5€)=50€ (10)*(.1)*(40€)
(6)=240 €
290 €
0 0€ (20)*(.2)*(40€)*(6)
=960€
960€
A safety stock of 20 frames gives the
lowest total cost
ROP = 50 units + 20 units = 70 units

8. Example
● Mean (average) demand = 350 units
● Standard deviation = 10 units
● Probality of stockout = 5 %
● Calculate the service level
● Calculate the safety stock
● Calculate the reorder point

10. Solution safety stock
● Probability of non stockout
1- .05 = .95
● Value of .95 is 1.64
● Deviation is 10 units
● 10* 1.64 = 16.4 units or 17 units

11. Solution reorder point
● Expected demand + safety stock
350 units + 16.4 or 17 units
= 366.4 or 367 units