Safety stock


Safety stock

Safety stock is a term used to describe a level of stock that is maintained below the cycle stock to buffer against stock-outs.Safety Stock or Buffer Stock, exists to counter uncertainties in supply and demand. [Inverntory Management Review. "Charles Atkins on inventory management topics: Safety Stock." June 10, 2005. http://www.inventorymanagementreview.org/2005/06/safety_stock.html (April 11, 2008).] Safety stock is defined as extra units of inventory carried as protection against possible stockouts. It is held when an organization cannot accurately predict demand and/or lead time for the product. For example, if a manufacturing company were to continually run out of inventory, they would need to keep some extra inventory on hand so they could attempt to meet demand while they were producing more inventory.

Safety stock can be utilized as a tool for a new company to judge how accurate their forecast is in the first few years. Especially when used strategically with a materials requirement planning worksheet. With an MRP worksheet you can judge how much you will need to produce to not need to rely on your safety stock. However a common strategy is to try and reduce your safety stock to help keep costs low, which is extremely important to companies with not much financial room to grow, or those trying to run on lean manufacturing.

Reasons for Safety Stock

[About.com "Logistics/Supply Chain: "Safety Stock." http://logistics.about.com/od/glossary/g/safety_stock.htm (April 11, 2008).] Safety Stocks enable organizations to satisfy customer demand in the event of these possibilities:
*Supplier may deliver their product late or not at all
*The warehouse maybe on strike
*A number of items at the warehouse maybe of poor quality and replacements are still in order
*A competitor maybe sold out on a product, which is increasing the demand for your products
*Random Demand (In reality, random events occur)
*Machinery Breakdown
*Unexpected increase in Demand
*...and other reasons

Reducing safety stock

Safety stock is used as a buffer to protect organizations from stock outs caused by inaccurate planning or poor schedule adherence by suppliers, as such its cost (in both material and management) is often seen as a drain on financial resources which results in reduction initiatives. Various methods exist to reduce safety stock, these includes better use of technology, increased collaboration with suppliers, and more accurate forecasting [The IOMA Handbook of Logistics and Inventory Management By Bob Donath, Institute of Management and Administration (Ioma), Institute of Management & Administration] [ S. P. Meyn, 2007. [http://decision.csl.uiuc.edu/~meyn/pages/CTCN/CTCN.html Control Techniques for Complex Networks] , Cambridge University Press, 2007. ] In a lean supply environment lead times are reduced which can help minimize safety stock levels reducing the likelihood and impact of stock outs.M [A Stitch in Time: Lean Retailing and the Transformation of Manufacturing By Frederick H. Abernathy] Due to the cost of safety stock many organizations opt for a service level led safety stock calculation for example 95% service level which could result in stock outs but at a level which was satisfactory to the company. The lower the service level the lower the requirement for safety stock

Inventory Policy

[.] The size of the safety stock depends on the type of inventory policy that is in effect. An inventory node is supplied from a "source" which fulfills orders for the considered product after a certain replenishment lead time.

Safety Stock Formula

1. Safety Stock: {Z*SQRT(Avg. Lead Time*Standard Deviation of Demand^2 + Avg. Demand^2*Standard Deviation of Lead Time^2)} [Inverntory Management Review. "Charles Atkins on inventory management topics: Safety Stock." June 10, 2005. http://www.inventorymanagementreview.org/2005/06/safety_stock.html (April 11, 2008).]

2. Re-order Point (ROP): Average Lead Time*Average Demand + "Z*SQRT(Avg. Lead Time*Standard Deviation of Demand^2 + Avg. Demand^2*Standard Deviation of Lead Time^2)" [Inventory Management Review. "Charles Atkins on inventory management topics: Safety Stock." June 10, 2005. http://www.inventorymanagementreview.org/2005/06/safety_stock.html (April 11, 2008).]

a. What is the average lead time for the part/finished good that you need? b. What is the standard deviation of that lead time? c. What is the expected demand you are working with? d. What is the standard deviation on this demand? e. How sure do you want to be that you are not going to run out (90%, 95%, 98%, 99%)? "Italicized section of the ROP formula is safety stock" *The first term (Average Lead time*Average Demand) is the average demand. *The second term Z*SQRT(Avg. Lead Time*Standard Deviation of Demand^2 + Avg. Demand^2*Standard Deviation of Lead Time^2)is the term that allows for the safety stock. In other words, the optimal safety stock level. [Inventory Management Review. "Charles Atkins on inventory management topics: Safety Stock." June 10, 2005. http://www.inventorymanagementreview.org/2005/06/safety_stock.html (April 11, 2008).]

References

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The formula is wrong!It leads to the addition of two terms which are not dimensionally the same.


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