Determining the Appropriate Level of Safety Inventory

We now discuss the relationship between safety inventory and the CSL and fr. In this section, we restrict our attention to the continuous review policy. The periodic review policy is discussed in detail in Section 12.6. The continuous review policy consists of a lot size Q ordered when the inventory on hand declines to the ROP. Assume that weekly demand is normally distributed, with mean D and standard deviation o-d. Assume replenishment lead time of L weeks. 

We first show how cycle service levels can be evaluated given a replenishment poUcy (and thus the corresponding safety inventory). We then show how to determine the required safety inventory given a desired cycle service level. 

EVALUATING SAFETY INVENTORY GIVEN A REPLENISHMENT POLICY In the case of B M, safety inventory corresponds to the average number of phones on hand when a replenishment order arrives. Given the lead time of L weeks and a mean weekly danand of D, using Equation 12.2, we have 

Given that the store manager places a replenishment order when ROP phones are on hand, we have 

This is because, on average, D X L phones will seU over the L weeks between when the order is placed and when the lot arrives. The average safety inventory when the replenishment lot arrives is thus ROP — D X L. The evaluation of safety inventory for a given inventory policy is described in Example 12-1 (see spreadsheet Chapter 12-examples worksheet Example 12-1). 

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