Optimize safety stock in supply

“Safety stock”, as the name suggests, is one of the most important instruments that help manager to be “safe”. In fact, managers are facing increasing pressure to minimize inventory costs, yet provide excellent customer service However, it is not easy to determine how much or how many stocks are considered being “safe”, when and where it should be held.. Moreover, safety stock involves in many stages and areas of production, especially multi-stage production, from the manufacturing sites to distribution sites; from independent demands to dependent demands.

As a result, many scholars and authors have been attempting to explore this tough but interesting topic and other issues involved. They approached the issue of safety stock from different dimensions such as safety stock & MRP or safety stock & lot-sizing. Also, methods of studying are varied from authors to authors since those methods must serve authors’ specific objectives. Though all of these studies covered only one or few issues regarding safety stock, some of them have been proved to be successful and applicable in various areas of manufacturing.

Therefore, this paper presents a comprehensive categorization and summary of major research on safety stock from year 2001 to 2004 in major operations management journals. The most popular method is simulation modeling, in which the author makes assumptions to develop (a) models (e. g. demand model, inventory model or safety stock model) or to examine the results of simulation study. Some papers were trying to develop a safety stock model, which to some extend might be useful for managers but fairly complicated and based on some essential assumptions.

However, it is hard to evaluate the effectiveness and practicability of these models if it is not testing in a real case of a company. Therefore, some authors have convincingly provided study case in a particular company to prove the feasibility of their safety stock level model. It is the case of Kodak, which will be examined in more detail in the next section. In fact, safety stock plays a central role in MRP so as to achieve an effective and stable scheduling.

This matter is the most attracting yet challenging to researchers due to its highly necessity and importance to almost all managers, especially in manufacturing field. Along with that, the concern about managing safety stock in terms of dimensioning, positioning and replenishing is also examined carefully. It is quite understandable as manager not only cares about how many or how much stock should be kept but also how to manage them, e.

g. storage space or timing. To begin with, the interrelation between safety stock and other factors namely lot-sizing and lead time was investigated carefully by some authors. The studies show that lot-sizing is an important issue in inventory management and the level of safety stock is definitely affected by lot-sizing. It is lot price and firm’s policy towards lot-sizing that define an appropriate safety stock level for a firm.

As for this subject, article “The Uncapacitated Lot-sizing with Sales and Safety Stock” has presented a model to determine safety stock level more accurately. Together with lot-sizing, lead time also critically affects the determination of safety stock level. In effect, there are two areas that managers can improve to reduce inventory without hurting service level are reduction of lead time from suppliers and the variability of this lead time. The work of Eppen and Martin (1988) concluded that decreasing in both areas can reduce inventory.

However, Chopra, Reinhardt and Dada through their research claimed that these conclusions which based on normal approximation are flawed, especially in the range of service levels where most companies operate. The authors proposed the existence of service level threshold greater than 50% below which reorder point increases with the decrease of lead time variability. Thus, for firm operating below this threshold but greater than 50%, reduction in lead time would lead to decrease in reorder point while decreasing in lead time variability would increase reorder point.

Therefore, decrease in lead time is the right lever to cut safety stock, not reducing lead time variability. Moreover, graphs of safety stock as a function of lead time and lead time as a function of safety stock are drawn in order to capture the relation between them. The study also shows that since most firms are operating in the range of cycle service level from 50% to 60%, managers should better off reduce lead time instead of lead time variability to achieve the goal of reducing safety stock.