TABLE OF CONTENTS Risk management in supply chain management has many different aspects and facets. Usually, it is applied where uncertainties of the demand that drives the supply chain have a noticeable influence on the effectiveness of a supply network. In order to ensure certain availabilities of raw and work-in-progress materials as well as finished products, it is inevitable to build up inventories at strategic points of a supply network, thus decreasing demand variability at, for example, manufacturing sites. Risk management has to balance the costs associated with stockouts and the various costs for managing inventories. In this respect, the problem just mentioned encompasses (1) determining where to put inventories for certain items, (2) setting appropriate service levels for these, and (3) developing a reliable method for translating a given service level and the associated costs (ordering costs, inventory holding costs, stockout costs, etc.) into a suitable replenishment policy.
Safety stock is supposed to cover uncertainties of demand during the inbound lead time of an item, that is, the time it takes from issuing an order from the warehouse to a supplier up to the arrival of the goods, as well as the uncertainties of the lead times. Here, however, the focus will be on demand uncertainties. If the safety stock level is set too high, more financial resources are bound to inventory than necessary. If, however, the safety stock level is too low, stock will run out more often and the desired serviceability may not be...
