Optimization of safety stocks in models with an order service level objective or constraint

Abstract

This paper studies inventory management models with an order service level objective or constraint. In practice, the order service level is a common key performance indicator, for example, in assembly-to-order systems and retail environments where customers request complete deliveries. For these models we propose a new component allocation procedure based on inventory rationing and new heuristics for safety stock calculation. The heuristics use item-based approximations for the order-based backorders. As the heuristics do not need detailed information about order bill-of-materials, their application scope is broad, and includes industrial-scale settings with a high number of orders. Computational results indicate that the heuristic solutions come close to the optimum. The inventory rationing procedure can lead to notable improvements if unit backorder costs differ significantly between each other.