Adjusting safety stock requirements with an AHP-based risk analysis

In most cases safety stock is determined based on the variability of the demand and lead time. The focus has been on the statistics and past performance, and the existing frameworks are not taking into account future development. Therefore we want to turn more to the future issues and develop the existing frameworks by implementing future factors to the decision making process. In this paper, the safety stock requirements are determined by applying a well-known decision support tool, the analytic hierarchy process (AHP). While the basis level for the safety stock is calculated by using the well-established calculation rules, the AHP-method is used for adjusting this basis level by taking into account the risks related to e.g. production, logistics or the overall operating environment. By using the AHP, the risk factors are mapped in the various areas, their importances are determined, and their impact on safety stock requirements is analysed. Furthermore, strategic viewpoints such as the strategies of the supplier company and the customers can be included in the process of determining the safety stock level. As the AHP is a flexible decision support tool, the safety stock requirements can easily be adjusted whenever there are changes in the risk or strategic factors, e.g. a strike threat by the logistics service providers would trigger a safety stock requirement analysis. In the paper, the utilisation of the AHP is demonstrated with an illustrative example.