Minimising inventory costs by properly choosing the level of safety stock

Abstract

Markets are everyday becoming ever more demanding and companies are adjusting in different ways. The objective of forecasting in a demand-driven supply network is to identify the probable range of expected demand so that supply can cover demand anywhere within the statistical range. Supply can cover the range either through having the capacity to replenish within lead times or by carrying excess inventory (safety stock). Nowadays, many companies put a lot of their energy and finance into setting the right level of safety stock and reducing related expenses. In this paper, we improve an existing method for calculating the safety stock for a particular Slovenian company. We present the existing and proposed methods for calculating safety stock and derive a cost model. Finally, we prove that the proposed method not only reduces average costs but also helps to meet the target customer service level – making it also applicable to other Slovenian companies encountering situations where demand is seasonal.