Dynamic Planned Safety Stocks in Supply Networks

Safety stocks are commonly used in inventory management for tactically planning against uncertainty in demand and/or supply. The usual approach is to plan a single safety stock value for the entire planning horizon. More advanced methods allow for dynamically updating this value. We introduce a new line of research in inventory management: the notion of planning time-phased safety stocks. We assert that planning a time-phased set of safety stocks over a planning horizon makes sense because larger safety stocks are appropriate in times of greater uncertainty while lower safety stocks are more appropriate when demand and/or supply are more predictable. Projecting a vector of safety stock values is necessary to assure upstream members in the supply network have advanced warning of changes. We perform an empirical study of U.S. industry, which demonstrates that significant savings can be achieved by employing dynamic planned safety stocks, confirming recent case study reports. We provide a simple optimisation model for the problem of minimising inventory given a vector of safety stock targets. We propose a computationally efficient solution procedure and demonstrate its implementation in an MRP/ERP system. We then illustrate an MRP/ERP planning system feature, which employs a dynamic planned safety stock module that supports a production planner by showing the inventory implications of safety stock plans