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)