Calculate Safety Stock ?
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.
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 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.
The graph above shows a common occurrence in stock
management as on day 3 the stock goes below the re-order
point triggering a purchase order however the stock
continues to be consumed and on day 7 hits the safety stock
with the new inventory arriving on day 8 taking the stock
above the reorder point.
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
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
set from past
experience coupled with information from the corporate sales
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.