A MODEL FOR ALLOCATING LIMITED RESOURCES WHEN MAKING SAFETY‐STOCK DECISIONS

Abstract

ABSTRACT This article describes the application of a goal programming model to set safety stocks in a fixed‐interval, variable order‐quantity inventory system. The firm is constrained by limited storage space and capital in the determination of inventory levels. The costs resulting from the use of the proposed model are contrasted with costs resulting from an alternative method based solely upon a forecasting model. The costs considered are holding costs, stock‐out costs, and the costs of acquiring excess resources. Excess resources are required when safety‐stock levels, determined by the forecasting model, would utilize more than the available capital and space. The proposed model eliminates the need for acquiring excess resources at the risk of increasing the frequency and size of stock outs. A trade‐off occurs between the potential for greater stock‐out costs versus the costs of acquiring excess resources‐borrowing additional funds or renting additional space. The goal programming model was used to set safety stocks for 15 product groups over a 46 month evaluation period for a multiproduct firm. Significant reductions in costs can be realized if the proposed model is used.

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