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Safety Inventory under a Periodic Review System

The objective of this paper is to derive and verify a formula for calculating safety inventory that satisfies a desired cycle service level in a periodic review system. Stochastic variables, including customer demand and supplier’s lead time, are assumed to be normally distributed. Independent demand items are considered and backorders are not allowed. After deriving the formula, a computerized model simulating a periodic review system is developed by utilizing Microsoft Excel. Hypothesis testing is employed to compare the desired cycle service level with the simulated cycle service level. The result of this paper shows that there is strong agreement between the derived formula and the simulation model. In other words, the derived formula is verified. Furthermore, this simulation model also allows prompt identification of the impact of changes in inventory policy on cycle service level and inventory cost.