29 March 2009

Safety Stock

Unfortunately, the calculation of the correct level of safety stock should be conditioned upon more than just lead time and average demand -- which are the limits of the standard approach to safety stock calculations. For example, what if the item is seasonal? What if the item has experienced unusual demand in the "average demand" calculation period? What if the item is subject to forecasts? The the accuracy of prior forecasts should be considered, as well. Yet another consideration is demand trends. Are sales at the facility increasing overall? Is the sales product line or purchase product line increasing or decreasing at a rate different than the overall trend at the facility.

Safety stock is specifically to cover variation in order to achieve specific levels of customer service; therefore, two goals should be held in mind and included in the calculation simultaneously: 1) achieving a specified level of customer service on the item and 2) minimizing inventory on-hand.

Good solutions for safety stock calculations should include replenishment factors that are dynamically maintained including:
1) Average lead time
2) Average daily demand based on working days (not calendar days or months)
3) Order cycle (for purchase product line)
4) Demand adjustments (for unusually high or low actual demand in "average demand" calculation look-back or look-forward periods)
5) Desired customer service level for item (SKU)
6) Trends

Few ERP software applications accomplish this task successfully.

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