Effect of setup time reduction on supply chain safety stocks

In most safety stock placement models, manufacturing lead times are treated as constant and exogenous quantities. In reality, however, manufacturing lead times depend on operating policies such as batch sizing and can be decreased by systematic investments in setup time reduction. This paper considers a manufacturer supplying a distribution network and integrates strategic safety stock placement with setup time reduction and batch sizing. We formulate the integrated problem with the objective of minimizing work-in-process and inventory holding costs and setup time reduction investment. An existing dynamic programming algorithm is extended to solve this problem efficiently. Using a two-stage distribution network, we characterize analytically the impact of setup time, batch sizes and integration on optimal positioning of safety stocks. Numerical studies on a three-stage network highlight the economic value of integration and setup time reduction. Setup time reduction is shown to be highly effective when utilization is high or when it can be accomplished with small investments. The savings from integration are high when value added at the manufacturer is high, and low when the marginal cost of setup reduction is either very high or very low.