Incorporating Stochastic Lead Times Into the Guaranteed Service Model of Safety Stock Optimization

Abstract

Effective end-to-end supply chain management and network inventory optimization must account for service levels, demand volatility, lead times, and lead-time variability. Most inventory models incorporate demand variability, but far fewer rigorously account for lead-time variability, particularly in multiechelon supply chain networks. Our research extends the guaranteed service model of safety stock placement to allow random lead times. The main methodological contribution is the creation of closed-form equations for the expected safety stock in the system; this includes a derivation for the early-arrival stock in the system. The main applied contributions are the demonstration of real stochastic lead times in practice and a discussion of how our approach outperforms more traditional heuristics that either ignore lead-time variability or consider the maximum lead time at each stage.

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