INVENTORY MANAGEMENT, SERVICE LEVEL AND SAFETY STOCK

There are many studies that emphasize as a first objective of inventory management to minimize the value invested in inventory because it has a direct impact on return on assets. This approach is not fully correct. The actual objective is to determine the value and the mix of inventory that support a high service level for customers and that maximizing the companies� financial performance. Many companies look at their own demand fluctuations and assume that there are too many variables to predict demand variability. Service level is used in inventory management to measure the performance of inventory policies and represents the probability of not being stock-out and not losing sales. Safety stock is inventory that is carried to prevent stock outs. Safety stock determinations are not intended to eliminate all stock outs, just majority of them. Companies choose to keep safety stock level high as a buffer against demand variability resulting in inefficiencies and high working capital requirements. Safety stock optimization enables companies to achieve savings and increase inventory turns.