Safety stock optimisation in distribution systems: a comparison of two competing approaches

An inherent differentiation and system level assessment approach to inventory management

Purpose

The purpose of this paper is to explain the effects of inherent differentiation and system level performance assessment in inventory management. This is done by comparing the performance of two common safety stock methods, by considering the methods’ inherent differentiation and item group-level performance effects.

Design/methodology/approach

Due to the lack of analytical relationships between the two methods, the analysis is based on event-driven simulations. Data are collected from eight different case companies. Findings explain the importance of assessing safety stock performance for groups of items and not for individual items, as is common in academic studies. It explains how the methods’ inherent differentiation and planning environment characteristics affect the relative performances of the two safety stock methods.

Findings

The study explains the importance of assessing performance of safety stock methods on a system-level, rather than on item-level measures. It explains why the demand fill-rate method has a negative impact on the performance for groups of items, while the number-of-days method has a positive impact. The study also explains how the group-level safety stock performance is affected by five demand data characteristics.

Research limitations/implications

The study explains the importance of assessing performance of safety stock methods on a system-level, rather than on item-level measures. It explains why the demand fill-rate method has a negative impact on the performance for groups of items, while the number-of-days method has a positive impact. The study also explains how the group-level safety stock performance is affected by five demand data characteristics.

Practical implications

Understanding the necessity of system level assessment of safety stock performance, how methods inherently differentiate service levels, and how demand characteristics affect methods’ performance can guide the choice of safety stock methods in companies.

Originality/value

No research on the characteristics of the number-of-days safety stock method, any assessment of differentiation characteristics of and comparison with the demand fill-rate method, has been published. The variable “inherent differentiation” is also introduced and defined.