The Effect of the Safety Stock on the Occurrence Probability of the Stock Shortage

Abstract

The objective of the logistics management is to guarantee the stock level required for the adequate handling of production at the lowest possible level of costs and risks. The main purpose of the paper is to present the relations between stock level and risk of shortages. As a result of the research, the introduction of the safety stock is the solution to cover the effects of the uncertain factors in the supply chain. The theoretical approach of the model assumes a deterministic operational environment, in practice, however, there are several unpredictable factors influencing the operation of the production company. By using the periodic and continuous review models, the paper presents the effects of demand changes and stochastic length of replenishment time on the risk of stock availability. We need to quantify a service level which determines the accepted probability of the shortage occurrence.