Time-phased safety stocks planning and its financial impacts: Empirical evidence based on European econometric data

Abstract

This paper explores the rationale for planning time-phased safety stocks. We assert that a single safety stock vector for the entire planning horizon (typically based on stationary demand forecast errors and stationary replenishment lead times) may be insufficient for hedging against uncertainties. We argue that planning time-phased safety stocks is prudent when faced with non-stationary demand and/or non-stationary supply. We scrutinize particularly whenever non-stationarity is due to heteroscedastic demand and resulting heteroscedastic demand forecast errors. Consequently, an empirical evidence on a wide basis is provided that such errors for manufactured products are highly heteroscedastic. To test the phenomenon and to estimate its impact at stock keeping unit level, we have conducted an econometric analysis using the EUROSTAT data from 1985 onwards. Specifically, we analyze new industrial orders across various industries and types of goods manufactured in the five largest European economies by using EViews 7.0. To demonstrate which inventory savings can accrue when safety stock levels are deliberately planned to vary in accordance with the observed heteroscedasticity, we estimate potential safety stock savings reusing the same data sets. Our findings indicate that one realization of non-stationarity, i.e., heteroscedastic demand, is indeed pervasive in the European industry. Thus, recognition of this demand nature may add to effective inventory management policies: reducing unnecessary safety stocks, improving service, or both relative to a single-valued safety stock regimen.