Safety stock or safety lead time: coping with unreliability in demand and supply

Abstract

Safety stock and safety lead time are common measures used to cope with uncertainties in demand and supply. Typically, these uncertainties are studied in isolated instances, ignoring settings with uncertainties both in demand and in supply. The current literature largely neglects case study based contexts and, often, single product situations are investigated in which machine set-ups are not considered. Based on the problems and findings in a case study, we investigate the effects of safety stock and safety lead time on delivery performance in a multi-product setting. The outcomes of the extensive simulation study indicate that utilising a safety lead time results in a higher delivery performance where there is a variable supply, whereas having a safety stock results in a higher delivery performance where there is unreliable demand information. In contrast to earlier findings in the single product situation, this study shows that managers facing the combination of unreliability in demand information and supply variability in a multiple product situation should opt for a safety lead time as the most effective way of improving their delivery performance.