6.7 Use of Safety Stock
When the EOQ assumptions are met, it is possible to schedule orders to arrive so that stockouts are completely avoided. However, if the demand or the lead time is uncertain, the exact demand during the lead time (which is the ROP in the EOQ situation) will not be known with certainty. Therefore, to prevent stockouts, it is necessary to carry additional inventory called safety stock.
When demand is unusually high during the lead time, you dip into the safety stock instead of encountering a stockout. Thus, the main purpose of safety stock is to avoid stockouts when the demand is higher than expected. Its use is shown in Figure 6.7. Note that although ...
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