Determination of Optimal Safety Stock Policies

Abstract

Setting safety stock policies are especially important in the management of retail and wholesale inventories, as well as stores, spare parts, supply items, and in certain areas of production planning. From a practical perspective, determining the optimal safety stock policy and the optimal service level requires specifying the demand distribution. This paper develops optimal safety stock policies under several commonly used statistical demand distributions; normal, exponential, andpoisson. In those situations where a manager has limited information on the shape of the demand distribution, Chebychev's Inequality Theorem is exploited to determine the optimal policies. The suggested computational approach enables the order quantity and the number of standard deviations that specifies the service level to be jointly determined by minimizing total relevant cost. A numerical example is also given to illustrate the computational process.