Determination of safety stocks in a lost sales inventory system with periodic review, positive lead-time, lot-sizing and a target fill rate

Abstract

Abstract An approximation for the fill rate, i.e. the percentage of demand being delivered from inventory on hand immediately, is derived for items in a periodic review inventory control system with lost sales. We assume demand is stochastic and discrete, lead-times are positive and replenishments are made in multiples of a given fixed case pack size. Most literature on inventory control systems assumes that unmet demand is backordered. The major reason for this is that the analysis of a general lost sales inventory system is known to be hard. To find an approximation for the fill rate, given a safety stock, we start with existing analytical approximations. By applying linear regression, we slightly modify these existing approximations. The new approximation is tested for a wide set of parameters and performs very well: the average approximation error for the fill rate is only 0.0028 and the standard deviation of the approximation error is 0.0045. Since the approximations are very fast, this result enables inventory controllers dealing with a lost sales inventory system to set safety stocks in accordance with the target service level set by their management in an effective way. The results of our study also show that the assumption that the lost sales system can simply be approximated by a backordering system if the target fill rate is at least 95%, may lead to serious approximation errors. These errors are particularly large when the lead-time is large or demand uncertainty is low and when on average there is at least one replenishment order outstanding.