Enhancing Inventory Management through Safety-Stock Strategies - A Case Study

Abstract

Efficient inventory management, including optimal safety-stock levels, is crucial for operational continuity and cost-effectiveness in various industries. This study seeks the optimal inventory management strategy to minimize costs and determine ideal safety-stock levels. It compares five approaches: the company’s (STAR) current “number of days” method, two alternative models from the literature (the theory of constraints (TOC) replenishment model and the service-level approach), and two newly developed hybrid methodologies (the TOC replenishment model with ABC–XYZ classification and the service-level approach with ABC–XYZ classification). The analysis focused on financial performance, considering inventory holding and shortage costs. Monthly production plans were established and fixed as constant based on predetermined optimum month-end inventory levels derived from each method. Through simulation, actual month-end inventory levels were assessed, comparing total inventory costs (TICs). While unit holding costs (UHCs) were documented in financial records in the company, unit shortage costs (USCs) were not; thus, USCs were examined in three scenarios. The results show that the second proposed hybrid model consistently outperformed the other four methods, including the company’s current approach, significantly reducing TIC. The analysis emphasizes the importance of demand variation in setting safety stocks and demonstrates the second hybrid methodology’s effectiveness in optimizing safety-stock strategies and improving overall inventory management efficiency. Keywords: inventory management; safety stock; ABC–XYZ analysis; service level approach; theory of constraints replenishment model; number-of-days method; inventory cost