Explain the impact of supplier lead time on safety inventory

What will be an ideal response?

Answer: The required safety inventory increases with an increase in the lead time and the standard deviation of periodic demand. Reducing the supplier lead time (L) will reduce the need for safety inventory. If lead time decreases by a factor of k, the required safety inventory decreases by a factor of k. The only caveat here is that reducing the supplier lead time requires significant effort from the supplier, while reduction in safety inventory occurs at the retailer. Thus it is important for the retailer to share some of the resulting benefits. A reduction in supply uncertainty can help dramatically reduce safety inventory required without hurting product availability.

Often, safety inventory calculations in practice do not include any measure of supply uncertainty, resulting in levels that may be lower than required. This hurts product availability.