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Basic Formulas Used in Safety Stock Management: Notations

This document provides basic formulas used in safety stock management. It defines notations used like cycle service level (CSL), costs of overstocking and understocking, average demand, reorder point (ROP), fill rate, and more. It then lists key formulas to calculate expected shortage per replenishment cycle, safety stock, service level, centralized safety inventory, holding cost savings from aggregation, optimal order quantity, and expected overstock. The formulas allow calculating critical parameters for determining optimal inventory levels while accounting for demand variability and supply lead times.

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Sachin Antony
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24 views

Basic Formulas Used in Safety Stock Management: Notations

This document provides basic formulas used in safety stock management. It defines notations used like cycle service level (CSL), costs of overstocking and understocking, average demand, reorder point (ROP), fill rate, and more. It then lists key formulas to calculate expected shortage per replenishment cycle, safety stock, service level, centralized safety inventory, holding cost savings from aggregation, optimal order quantity, and expected overstock. The formulas allow calculating critical parameters for determining optimal inventory levels while accounting for demand variability and supply lead times.

Uploaded by

Sachin Antony
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Basic Formulas Used in Safety Stock Management

Notations:
CSL  Cycle service level
Co Cost of overstocking
Cu Cost of understocking
D  Average demand per period
Di  Mean weekly demand in a region-i
ESC Expected Shortage Per Replenishment Cycle
fr Fill Rate
H Inventory holding cost
L  Average lead time for replenishment
ROP Re-Order Point
sL standard deviation of lead time
ss safety stock
σD standard deviation of demand
σi  SD of weekly demand in region-i
ρij  correlation of weekly demand for regions-i and j (i!=j)

List of Formulas
DL = D*L

σL = √(𝐷2 ∗ 𝑠𝐿 2 ) + (𝐿 ∗ σD2 )
𝜎
𝑐𝑣 =
𝜇
ss = ROP – DL
ss = NORMSINV(CSL)*sqrt(L)*σD
CSL = F(ROP, DL, σL) = NORMDIST(ROP, DL, σL,1)
ESC = -ss[1-NORMDIST(ss/σL ,0,1,1)] + σLNORMDIST(ss/σL,0,1,0)
fr = 1 – (ESC/Q)
𝑘

𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑓𝑒𝑡𝑦 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = ∑ 𝑁𝑂𝑅𝑀𝑆𝐼𝑁𝑉(𝐶𝑆𝐿) ∗ √𝐿 ∗ 𝜎𝑖


𝑖=1
𝑘

𝐷𝑐 = ∑ 𝐷𝑖
𝑖=1
𝑘
𝑐)
𝑉𝑎𝑟(𝐷 = ∑ 𝜎𝑖 2 + 2 ∗ ∑ 𝜌𝑖,𝑗 ∗ 𝜎𝑖 ∗ 𝜎𝑗
𝑖=1 𝑖>𝑗

σDc = SQRT(Var(Dc))
𝑘

𝑇𝑜𝑡𝑎𝑙 𝐶𝑒𝑛𝑡𝑟𝑎𝑙𝑖𝑧𝑒𝑑 𝑆𝑎𝑓𝑒𝑡𝑦 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = ∑ 𝑁𝑂𝑅𝑀𝑆𝐼𝑁𝑉(𝐶𝑆𝐿) ∗ √𝐿 ∗ 𝜎𝐷 𝑐


𝑖=1

𝐻𝑜𝑙𝑑𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑠𝑎𝑣𝑖𝑛𝑔𝑠 𝑏𝑦 𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑖𝑜𝑛


𝑁𝑂𝑅𝑀𝑆𝐼𝑁𝑉(𝐶𝑆𝐿) ∗ √𝐿 ∗ 𝐻 𝑘
= ∗ (∑ 𝜎𝑖 − 𝜎𝐷 𝑐 )
𝐷𝑐 𝑖=1

𝐶𝑢
𝐶𝑆𝐿∗ =
𝐶𝑢 + 𝐶𝑜
Optimum order quantity (O*) = NORMINV(CSL*, D or DL, σD or σL)

𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑜𝑣𝑒𝑟𝑠𝑡𝑜𝑐𝑘
𝑂−𝜇 𝑂−𝜇
= {(𝑂 − 𝜇) ∗ 𝑁𝑂𝑅𝑀𝐷𝐼𝑆𝑇 [ , 0,1,1]} + {𝜎 ∗ 𝑁𝑂𝑅𝑀𝐷𝐼𝑆𝑇[ , 0,1,0]}
𝜎 𝜎
(Note: In the above formula sigma and mu will depend on whether you compute with/ without lead times)

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