Lead time demand variability, safety stock and the inventory cost

Juan Manuel Izar Landeta (), Carmen Berenice Ynzunza Cortés and Orlando Guarneros García
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Juan Manuel Izar Landeta: Universidad Autónoma de San Luis Potosí, México
Carmen Berenice Ynzunza Cortés: Universidad Tecnológica de Querétaro, México
Orlando Guarneros García: Universidad Autónoma de San Luis Potosí, México

Contaduría y Administración, 2016, vol. 61, issue 3, 499–513

Abstract: The objective of this research is to investigate the impacts of the lead-time demand variability on the safety stock and the inventory cost. The analysis is applied to two products for which data is available, one with a normal distribution of lead time demand and the other with uniform distribution. The costs analyzed are the safety stock maintenance and the shortages when the consumer demand exceeds availability. The safety stock is set at the value that minimizes the sum of the two previously mentioned costs and is then analyzed how the demand variability affects this stock. The results were similar for the two products tested. With more demand variability, safety stock increases linearly; this behavior is maintained, even if the cost structure of maintenance or shortages are modified. Likewise, with more demand variability the minimum cost increases to a greater extent for the item with a normal distribution. The service level of the minimum cost is located at a value below 100% for both items, 94.5% for the normal distribution item and 96% for the uniform distribution item. In summary, the two articles exhibited an inverse relationship between the service level of the minimum cost and the ratio of the maintenance cost and the shortages.

Keywords: Safety stock; Lead time demand; Demand variability; Service level; Inventory costs (search for similar items in EconPapers)
JEL-codes: L11 L23 (search for similar items in EconPapers)
Date: 2016
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