Supplier allocation and safety stock determination based on supplier reliability

Supplier selection and allocation of demand across suppliers has become a critical activity for organisations. Safety stocks are necessary to protect against shortages caused by supplier delivery failures and to achieve reasonable customer service levels. We present a new supplier selection model that determines safety stocks based on the supplier delivery reliability. The model includes procurement costs, supplier management costs, inventory carrying costs, and loss costs due to missed deliveries. An example is provided, followed by a sensitivity analysis that illustrates how the model can be used to analyse different sourcing strategies under various cost parameters.