DETERMINING SAFETY STOCK LEVELS
Companies are vulnerable to shortages during replenishment lead times, so one function of inventory is to provide safety stock as a cushion for satisfying unexpected customer demand. Remember that you typically place the replenishment order when the inventory level reaches the reorder point. Remember, too, that your company may experience a shortage between the time you place the replenishment order and the time you receive the items you ordered.
When we have no demand uncertainty, we set the reorder point to equal-to-average demand during lead time, or
R = dL
where R = reorder point in units
d = daily demand in units
L = lead time in days
Therefore, if d = 20 units and L = 10 days, the reorder point is 200 units. Since we know demand and lead time with certainty, the replenishment order arrives just as the on-hand inventory is depleted.
Suppose your kayak suppliers cannot always keep a firm delivery date because of fluctuation in materials availability at their end. As a result, uncertainty is a condition of your kayaking equipment operation. To support your company's customer service objectives, your policy is to carry safety stock. You add the amount of safety stock carried to the reorder point, and the reorder point becomes
R = dL + SS
where SS = safety stock in units
For example, if d = 20 units, L = 10 days, and SS = 50 units, the reorder point ...
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