The effect of lead-time variability on inventory: expected on-hand inventory vs. safety stock

Xiaoming Li and Chunxing Fan

International Journal of Operational Research, 2023, vol. 48, issue 2, 233-245

Abstract: Many papers and textbooks use safety stock as the inventory performance measure. But, this is only an approximation. Moreover, the lead-time variability causes conflicting effects on safety stock. In this paper, we argue that the right performance measure should be the expected on-hand inventory, which is consistent with the standard newsvendor problem. Then, the results always call for lead-time variability reduction, which always reduces both the expected on-hand inventory and the expected shortage inventory. These results are consistent and also indicate increased fill rates or service levels. We further show that the expected on-hand inventory and the expected shortage inventory are convex functions. When lead-time variability increases, lead-time demand spreads out further to both left and right tails, and thus causes higher expected on-hand inventory, higher expected shortage inventory, and higher cost. We finally present numerical examples to show managerial insights for decision makers in industry.

Keywords: lead-time reduction; safety stocks; expected on-hand inventory. (search for similar items in EconPapers)
Date: 2023
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