Concepts for Safety Stock Determination under Stochastic Demand and Different Types of Random Production Yield

Abstract

We consider a manufacturer's stochastic production/inventory problem under periodic review and present concepts for safety stock determination to cope with uncertainties that are caused by stochastic demand and different types of yield randomness. Order releases follow a linear control rule. Taking manufacturing lead times into account it turns out that safety stocks have to be considered that vary from period to period. We present an approach for calculating these dynamic safety stocks. Additionally, to support practical manageability we suggest two approaches for determining appropriate static safety stocks that are easier to apply.