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Is there a trade-off between service level and inventory buffer size?
Standard models for inventory optimisation in Supply Chain talk of a trade-off between the desired service level and the size of inventory buffers. It means that to improve service levels, we need to increase inventory buffers. Similarly, if we want to reduce system inventory, service levels would get affected.
This trade-off is deep rooted in the mindset of most Supply Chain teams. They struggle continuously in trying to balance inventory and service levels.
Can we break this trade-off?
The trade-off is indeed real, unless we challenge the fundamental capabilities of the supply chain.
Dr. Goldratt, father of TOC, mentioned that inventory buffers should be sized for the maximum demand during Replenishment Lead Time (RLT), adjusted for supply reliability.
Does it offer a clue to breaking the trade-off?
More on it in my next post…