Let’s say you have an average sale of 100 quantities per day for a product with an average lead time of 10 days. Simply put, we want to “secure X days of supplies”, so we need to estimate “safety days”. The first method is the most basic method, which I also call “the old-fashioned way”. We will go through 6 calculation methods for your safety stock, from the simplest to the most complex one. Safety Stock Calculation: 6 different formulas The Safety stock goal is to find the right balance between the customer service rate and inventory cost. I advise you to be vigilant about the safety stock and focus on the fundamental issues above. If you hold unnecessary stock levels to cover all those issues, you will have unreasonably high stock costs. Safety stock can be reassuring, but it often reflects fundamental problems: poor data accuracy, poor forecast accuracy, outdated IT systems, lack of communication with suppliers… Typically, maintaining high safety stock is a trick to hide the root causes of our issues. Risks related to safety stockīefore considering the formulas, I would like to stress the risks involved in safety stock. This is in theory, but in reality, supply and demand are much more chaotic. RP = Safety Stock + Average Sales × Lead time We make an order when we reach the Reorder Point, and we receive the item when we reach the safety stock level. The reorder point is the stock level at which we need to replenish inventory. ![]() We can then combine EOQ with Safety Stock to ensure optimized ordering quantities and protection against uncertainty. To know more about EOQ, check out my article: EOQ formula with examples in Excel. The optimal quantity to order in terms of cost savings is the EOQ (Economic Order Quantity). The basic Safety Stock scenario follows a Continuous Review Policy: quantities to order are fixed. Safety Stock with EOQ (Economic Order Quantity) The distribution of your products’ lead time looks like this:īecause most of the time you cannot predict when those issues happen, you need safety stock to cover supply uncertainties. Then, your lead time highly varies, with some deliveries arriving early and others arriving much later than your average lead time. You have different supply hazards: missing components, higher production lead time than expected, third-party transportation problems, customs clearance delays, or even IT issues. Let’s take the following example: you produce in China and you deliver in France, with an average lead time of 40 days. Picking/Packing time in the warehouse or factoryĪny hazard over one of those factors directly impacts the lead time, and so the risk of shortage or overstock.IT confirmation delay / Purchase Order delays.Indeed, there are many factors impacting the total lead time: There are also supply hazards: specifically, lead time uncertainty. You will probably have a better forecast quality on toilet paper than on the umbrella. You might have a stronger safety stock on the umbrella to cover higher risks of shortages.Ģ) Lead Time uncertainty (or supply uncertainty) ![]() Products have different levels of demand uncertainty.įor example, there are stable products such as toilet paper, and others much more uncertain, such as umbrellas – which are sold only during rainy periods. You need a safety stock to cover yourself against two hazards or uncertainties: demand and lead time. The safety stock (or buffer stock) is the stock level that limits stock shortages due to unforeseen events (forecasts not in line with demand, longer than expected supply time, etc…) Why do you need safety stock? How to choose the right formula for your Safety Stock?. ![]() The future of Inventory Management: Machine Learning.Other ways to compute your Safety Stock.Limits of the normal distribution for your safety stock:.Method 6: Normal distribution with uncertainty about the demand and the lead time (dependent).Method 5: Normal distribution with uncertainty about the demand and the lead time (independent).Method 4: Normal distribution with uncertainty about the lead time.Method 3: Normal Distribution with uncertainty about the demand.Safety Stock Calculation: 6 different formulas.Safety Stock with EOQ (Economic Order Quantity).2) Lead Time uncertainty (or supply uncertainty).
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