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How to
Calculate Safety Stock
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In today's
world of stock management there is an almost ubiquitous
focus on minimizing inventory costs. Safety stock, by it's
very nature is often seen as a drain on the corporate
balance sheet. By definition, safety stock is required to
protect the business against process failure. Inaccurate
demand forecasting and failure in supplier delivery
performance can both result in stock outs and safety stock
is required to act as a buffer to protect the organization. |
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Inventory
analysts, when controlling stock set the minimum stock
level at the lowest stock level that an organization is
prepare to tolerate, this is usually set at greater than
zero in order to counter delivery delays or spikes in
demand.
If safety stock was not present, stock outs could occur
which could be drastic to production runs or even worse risk
delays to the end customer.
Safety stock then is a necessary evil because it assumes
that demand can not accurately be forecasted and/or
suppliers |
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fail to deliver on
time (both common business scenarios). The level of safety
stock will vary from one organization to another but
typically balances the cost of stock holding on one hand
against the cost of stock outs on the other.
A number of common determinants exist for calculating safety
stock they are availability e.g. the probability of not
running out of stock during the reorder stage and the
service level i.e. ratio of demand filled against total
demand. Interestingly both methods may yield different
results. |
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Also within a
manufacturing scenario there may be a requirement to build
additional manufacturing cycle time into the safety stock as
there it may not be as simple as calculating the safety
stock required to manage
until the vendor's shipment arrives at the warehouse. Manufacturing
may also invest more towards mission critical items that
could serious impact production runs.
Establishing levels of safety stock for organizations with
very dynamic demand can prove difficult. Demand forecasting
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set from past
experience coupled with information from the corporate sales
team.
Safety stock ensures that if actual usage exceeds a forecast then
the customer remains satisfied. However the cost of
achieving this is may be considered prohibitive and many
organizations develop a service level/availability for
example 95% availability is in simple terms a level of stock
outs that the organization is comfortable with both
financially and from a customer service stance.
When calculating safety stock complex algorithms can be
utilized in order calculate an adequate service level this
will general include the holding cost of inventory, lead
time/capacity constraints. There are a variety of papers
available online which develop this concept.
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Comprehensive software tools also exist to support inventory
levels. Suppliers such as
http://www.barloworld-logistics.com
and http://www.logility.com/ provide tools that can plan
inventory models based on varying attributes (such as
service levels) as these tools can analyze demand profiles,
stock movements, lead times across multiple channels,
warehouses etc producing a thorough analysis of the
inventory and required safety stock.
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Safety stock is an important element in most inventory
management models, ensuring that the safety stock is
accurate can require detailed analysis of both requirements
and cost to ensure that the customers' expectation and
corporate costs are managed accordingly |
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