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.

Need help?  Contact me.


Mike Hutto said...

"Few ERP software applications accomplish this task successfully."

Who are the few, in your opinion?

RDCushing said...

The fact of the matter is, ERP systems are probably NOT best suited to perform inventory replenishment calculations. Just like the finest cameras do not include a cellular phone, ERP software that is trying to be everything to everyone possible is not going to be a top performer in every module. That's where best-of-breed solutions and enterprise application integration (EAI) come into play and are able to deliver rapid ROI to the firms that move in that direction.

That being said, let's consider the fact that EVERY forecast is wrong, and the more tightly one seeks to define the forecast, the more likely it is to be wrong. Therefore, spending more and more money on trying to improve the forecast is likely money wasted to a great extent.

However, inventory management methods based on PULL, rather than forecasting and PUSH, are NEVER wrong. If a quantity of x was consumed at some point in the supply chain, it was consumed in actuality. Therefore, based on the pull system's parameters, it should be replenished.

The advantage of PULL methodologies go beyond 100% accuracy in quantities, however. PULL methods can frequently -- more often than not -- be implemented a little or no cost, add almost nothing to ongoing expenses, and do NOT require the addition of more computers, software, or other fancy gadgetry. Compare that to any technological supply chain solution.

If, however, you absolutely must work from a forecast for your inventory and demand planning, then I would recommend a best-of-class solution such as that available from Avercast (http://www.avercast.com). An Avercast solution will outperform any ERP-based forecasting and demand planning solution known to me.

Thanks for asking.