The effect of lead time uncertainty on safety stocks

Sunil Chopra, Gilles Reinhardt, Maqbool Dada

Research output: Contribution to journalArticle

Abstract

The pressure to reduce inventory investments in supply chains has increased as competition expands and product variety grows. Managers are looking for areas they can improve to reduce inventories without hurting the level of service provided. Two areas that managers focus on are the reduction of the replenishment lead time from suppliers and the variability of this lead time. The normal approximation of lead time demand distribution indicates that both actions reduce inventories for cycle service levels above 50%. The normal approximation also indicates that reducing lead time variability tends to have a greater impact than reducing lead times, especially when lead time variability is large. We build on the work of Eppen and Martin (1988) to show that the conclusions from the normal approximation are flawed, especially in the range of service levels where most companies operate. We show the existence of a service-level threshold greater than 50% below which reorder points increase with a decrease in lead time variability. Thus, for a firm operating just below this threshold, reducing lead times decreases reorder points, whereas reducing lead time variability increases reorder points. For firms operating at these service levels, decreasing lead time is the right lever if they want to cut inventories, not reducing lead time variability.

Original languageEnglish (US)
Pages (from-to)1-15
Number of pages15
JournalDecision Sciences
Volume35
Issue number1
DOIs
StatePublished - Dec 2004
Externally publishedYes

Fingerprint

Managers
Supply chains
Industry
Uncertainty
Safety stock
Lead time

Keywords

  • Inventory Management
  • Mathematical Programming/Optimization
  • Probability Models and Supply Chain Management

ASJC Scopus subject areas

  • Management of Technology and Innovation
  • Strategy and Management
  • Business, Management and Accounting(all)

Cite this

The effect of lead time uncertainty on safety stocks. / Chopra, Sunil; Reinhardt, Gilles; Dada, Maqbool.

In: Decision Sciences, Vol. 35, No. 1, 12.2004, p. 1-15.

Research output: Contribution to journalArticle

Chopra, Sunil ; Reinhardt, Gilles ; Dada, Maqbool. / The effect of lead time uncertainty on safety stocks. In: Decision Sciences. 2004 ; Vol. 35, No. 1. pp. 1-15.
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