Logo Logo

The Effect of Lead Time Uncertainty on Safety Stocks, Decision Sciences

Abstract

The pressure to reduce inventory investments in supply chains has increased as competition expands and product variety grows. Managers are looking for areas they can improve to reduce inventories without hurting the level of service provided. Two areas that managers focus on are the reduction of the replenishment lead time from suppliers and the variability of this lead time. The normal approximation of lead time demand distribution indicates that both actions reduce inventories for cycle service levels above 50%. The normal approximation also indicates that reducing lead time variability tends to have a greater impact than reducing lead times, especially when lead time variability is large. We build on the work of Eppen and Marin (1988) to show that the conclusions from the normal approximation are flawed, especially in the range of service levels where most companies operate. We show the existence of a service-level threshold greater than 50% below which reorder points increase with a decrease in lead time variability. Thus, for a firm operating just below this threshold, reducing lead times decreases reorder points, whereas reducing lead time variability increases reorder points. For firms operating at these service levels, decreasing lead time is the right lever if they want to cut inventories, not reducing lead time variability.

Type

Article

Author(s)

Sunil Chopra, Maqbool Dada, Gilles Reinhardt

Date Published

2004

Citations

Chopra, Sunil, Maqbool Dada, and Gilles Reinhardt. 2004. The Effect of Lead Time Uncertainty on Safety Stocks. Decision Sciences. 35(1): 1-24.

KELLOGG INSIGHT

Explore leading research and ideas

Find articles, podcast episodes, and videos that spark ideas in lifelong learners, and inspire those looking to advance in their careers.
learn more

COURSE CATALOG

Review Courses & Schedules

Access information about specific courses and their schedules by viewing the interactive course scheduler tool.
LEARN MORE

DEGREE PROGRAMS

Discover the path to your goals

Whether you choose our Full-Time, Part-Time or Executive MBA program, you’ll enjoy the same unparalleled education, exceptional faculty and distinctive culture.
learn more