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Lead time demand variability, safety stock and the inventory cost

Author

Listed:
  • Juan Manuel Izar Landeta

    (Universidad Autónoma de San Luis Potosí, México)

  • Carmen Berenice Ynzunza Cortés

    (Universidad Tecnológica de Querétaro, México)

  • Orlando Guarneros García

    (Universidad Autónoma de San Luis Potosí, México)

Abstract

The objective of this research is to investigate the impacts of the lead-time demand variability on the safety stock and the inventory cost. The analysis is applied to two products for which data is available, one with a normal distribution of lead time demand and the other with uniform distribution. The costs analyzed are the safety stock maintenance and the shortages when the consumer demand exceeds availability. The safety stock is set at the value that minimizes the sum of the two previously mentioned costs and is then analyzed how the demand variability affects this stock. The results were similar for the two products tested. With more demand variability, safety stock increases linearly; this behavior is maintained, even if the cost structure of maintenance or shortages are modified. Likewise, with more demand variability the minimum cost increases to a greater extent for the item with a normal distribution. The service level of the minimum cost is located at a value below 100% for both items, 94.5% for the normal distribution item and 96% for the uniform distribution item. In summary, the two articles exhibited an inverse relationship between the service level of the minimum cost and the ratio of the maintenance cost and the shortages.

Suggested Citation

  • Juan Manuel Izar Landeta & Carmen Berenice Ynzunza Cortés & Orlando Guarneros García, 2016. "Lead time demand variability, safety stock and the inventory cost," Contaduría y Administración, Accounting and Management, vol. 61(3), pages 499-513, Julio-Sep.
    • Handle: RePEc:nax:conyad:v:61:y:2016:i:3:p:499-513
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Safety stock; Lead time demand; Demand variability; Service level; Inventory costs;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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