Correlation and Safety Stock: A Basic Analysis

8 Pages Posted: 13 Feb 2013 Last revised: 16 Sep 2013

Date Written: August 7, 2013

Abstract

One of the basic tenets of materials management in manufacturing is the holding of inventory to meet specified customer service levels. Increases in safety stock can usually only be avoided by initiatives such as forecasting, just-in-time, or lean manufacturing whose combined result is to increase the correlation between supply and demand. In this paper, a simple approximation to estimate the required safety stock is derived for a correlation of supply and demand of a certain magnitude.

Keywords: safety stock, correlation, inventory, variance, supply chain

JEL Classification: L6

Suggested Citation

Smith, Reginald, Correlation and Safety Stock: A Basic Analysis (August 7, 2013). Available at SSRN: https://ssrn.com/abstract=2216336 or http://dx.doi.org/10.2139/ssrn.2216336

Reginald Smith (Contact Author)

Supreme Vinegar LLC ( email )

3430 Progress Dr.
Suite D
Bensalem, PA 19020

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