Stochastic Inventory Management in a Shortage

Read this article. The study indicates that a stochastic inventory management system should be preceded by determining the economic feasibility of the shortage. How does using real-time statistics help determine purchasing?

Discussion of the methodology and prospects of its application

Thus, the proposed algorithm allows linking the deterministic and stochastic conditions of the inventory management system.

Shortage costs and correlation with the storage costs set by the scenario approach must determine the most expedient shortage level in these conditions. And, therefore, the optimal service level, which, in turn, determines the volume of safety stock.

It can be argued that the volume of the optimal order quantity is weakly dependent on the different values of shortage costs, which is associated with the stability of the Wilson model.

The optimal value of the threshold level or the re-order point directly depends on the amount of the safety stock: the higher the value of the optimum safety stock, the higher the value of the threshold level. Thus, the increase of the service level leads to an increase of all horizontal levels of the inventory control system – safety, threshold level and maximal level of stocks.

The strong side of the study is the development and testing of the algorithmic procedure for the determination of inventory management system parameters in the conditions of uncertainty, which can react promptly to the dynamics of changes in consumer demand and inventory status. This allowed combining the deterministic methods of determining the optimal order quantity and stochastic methods of calculating the volume of safety stock.

Economically expedient level of shortage determines the optimal level of customer service and the optimum amount of safety stock by the criterion of total costs.

The restriction of this method is the assumption that the intensity of consumption and time of replenishment of stocks as random quantities have normal distribution law.

The possibilities for further research is testing of the proposed methodological approach to inventory management with a seasonal pattern.

The threats to the results of the study are that in a rapidly changing market environment the company is forced to constantly change the inventory management strategy, not always guided by the formalized criteria. Targeting the non-deficiency of stocks increases the risks of creating excess inventories and thus increases the irrational losses of funds and enterprise resources.

From a practical point of view, the proposed approach allows avoiding the creation of excess inventory in supply chains and, accordingly, reducing storage costs, the need for the working capital and the risks of accumulation of non-liquid stocks.