Safety Stocks

 Safety stock
 buffer added to on hand inventory during lead
time
 Stockout
 an inventory shortage
 Service level
 probability that the inventory available during
lead time will meet demand
 Variable Demand with
a Reorder Point
Q
Inventory level

Reorder
point, R

0
LT LT
Time
 Reorder Point with
a Safety Stock
Inventory level

Q
Reorder
point, R

Safety Stock
0
LT LT
Time
 Reorder Point With
Variable Demand

R = dL + zσ d L
where
d = average daily demand
L = lead time
σ d = the standard deviation of daily demand
z = number of standard deviations
corresponding to the service level
probability
zσ d L = safety stock
Reorder Point for
a Service Level
Probability of
meeting demand during
lead time = service level

Probability of
a stockout

Safety stock
zσ d L

dL R
Demand
 Reorder Point for
Variable Demand
The carpet store wants a reorder point with a 95%
service level and a 5% stockout probability
d = 30 yards per day
L = 10 days
σ d = 5 yards per day

For a 95% service level, z = 1.65

R = dL + z σ d L Safety stock = z σ d L
= 30(10) + (1.65)(5)( 10) = (1.65)(5)( 10)
= 326.1 yards = 26.1 yards
 Order Quantity for a
Periodic Inventory System

Q = d(tb + L) + zσ d tb + L - I

where
d = average demand rate
tb = the fixed time between orders
L = lead time
σ d = standard deviation of demand

zσ d tb + L = safety stock
I = inventory level
Fixed-Period Model with
Variable Demand
d = 6 bottles per day
σ d = 1.2 bottles
tb = 60 days
L = 5 days
I = 8 bottles
z = 1.65 (for a 95% service level)

Q = d(tb + L) + zσ d tb + L - I
= (6)(60 + 5) + (1.65)(1.2) 60 + 5 - 8
= 397.96 bottles