BUS606: Operations and Supply Chain Management

A methodical approach to determining the optimal parameters of a stochastic inventory management system in the context of an economically justified deficit that allows responding quickly to fluctuations in demand and the dynamics of changes in inventory status is proposed and tested on real data. This approach relates, in particular, the shortage costs and the corresponding service level with the values of safety stock, order quantity and the threshold stock level. The technique is applicable to the normal distribution of inventory consumption and delivery time.

Determining the optimal parameters of the inventory management system in the conditions of unstable consumption and replenishment allows you to prevent an overestimation of the volume of inventories in the warehouses of industrial and commercial enterprises. At the same time, the need for working capital (the value of investments in stocks) and the total value added in the supply chains of goods decline, the risks of illiquid stocks decrease.

As a result of the study, a causal relationship was established between the level of customer service, the shortage level, order quantity and safety stock volume. It is proved that the procedure for determining the parameters of the stochastic inventory management system should be preceded by determining the economically feasible shortage level, which will determine the optimal level of customer service and the optimal size of safety stock by the criterion of total costs.

The proposed approach allows processing the accumulated statistical data on the dynamics of changes in stock status in real time using statistical methods and finding a compromise between the size of safety stock, the shortage level and the level of customer service by the criterion of minimum total costs.

Source: Lidiia Savchenko and Mariya Grygorak, http://journals.uran.ua/eejet/article/view/156475
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