LAUSR

Abstract Safety stock of mining production is kept to prevent ore supply from stock-out, due to the existence of high uncertainty in mining operations and various unforeseen geological conditions. The downstream of mining normally runs in a relatively constant status which tolerates limited fluctuation from the upstream. An unreliable ore supply would cause the insufficient equipment utilisation and economical loss, and even the shutdown of processing plant. Since the rise of inventory management in the 1980s, there have been many studies conducted for enterprises to optimise their inventory and fulfil their clients’ demands. However, those studies mostly focus on the retail industry. The research interests are mainly in the variability of demand and lead time, and the modelling of a multi-echelon chain, which are not often suitable for mining production. Mining production has its own features, which requires a tailor-made policy of safety stock for itself. Real options technique is one suitable method to determine the safety stock of mining production. In this paper, it first analyses the flaws of the existing techniques of calculating safety stock to be used in mining production, and then elaborates the development of a new safety stock policy, based on a real options technique. By a case study, it analyses real data of mining production from Kittilä mine, illustrates the use of the new method and compares this new method with the conventional methods. It shows that the real options approach can provide mining practitioners with a more accurate and reasonable stock level, and more profit.