Safety stock placement in supply chains with expediting

Abstract

Numerous documented implementations demonstrate the guaranteed-service (GS) model of safety stock optimization has applicability to practice. The standard GS (S-GS) model employs safety stock as the only countermeasure to satisfy a specified demand bound, assuming any demand in excess of the bound will be addressed by countermeasures which are not modeled. We extend the S-GS model to explicitly include expediting as a second countermeasure. Thus, our two-countermeasure GS (2C-GS) formulation addresses more demand variability explicitly than the S-GS model. We characterize a stage’s optimal base-stock level as the maximum of two base-stock calculations, and show how the resulting optimization problem can be efficiently solved using existing GS solution techniques. For normally distributed demand, we analytically characterize when the S- and 2C-GS approaches deploy different configurations of safety stock. For a series of numerical experiments, we find that the 2C-GS model places safety stocks at more stages than the S-GS model. When compared to the 2C-GS solution, the suggested safety stock positioning of the S-GS approach results in an average cost increase of 7%, and a maximum of 42%, in real-world supply chain settings. Furthermore, the benefits from expediting increase when downstream stages have greater expediting capability.