Improvement of inventory management by developing a mathematical model to determine safety stock levels in a case company

Abstract

This master’s thesis develops a mathematical model to determine safety stock and inventory target levels in a realistic environment. In the selection of an appropriate formula for the mathematical model, it was important that the formula is easy to understand and use by the responsible inventory managers and unlike other academic approaches, does not require additional resources or statistical IT tools. In the environment of a case company, an appropriate model was developed which processes demand and lead time information which were identified as main drivers of uncertainties a procurement department must deal with in daily routines. In addition to the selected safety stock formula, the developed mathematical model uses the support of academic literature about classification of inventory items which delivers additional parameters suitable for inventory management decision-making. The selected parameters support the development of an improved understanding of the characteristics of stock keeping units. To connect the selected additional parameters with the target of safety stock determination, clear definitions for each parameter are defined and a scoring model was developed which determines the appropriate safety stock factor that adjusts the safety stock levels for each investigated item accordingly. As a result, realistic safety stock level suggestions are presented which consider multiple inputs processed in the developed mathematical model and help inventory managers to move forward to a more fact-based inventory decision-making process.