Maximum Safety Stock = (1,500 – 1,250) × 3 = 750 Your reorder level at the safety stock level of 750 units would be 3,250. Reorder Level = Average Weekly Demand × Average Lead Time + Safety Stock = 1,250 × 2 + 750 = 3,250 units. Your CFO suspects that the safety stock is too high.
What are reorder points and safety stock levels and why are they important?
Reorder points and safety stock levels are useful calculations to better manage your inventory, but sometimes access to the right data may force you to use an approximation for some of the values. Most companies can easily obtain daily or weekly sales data. It’s the variation in the supplier delivery times that is more difficult to obtain.
What is the difference between cycle stock and safety stock?
Stock inventory usually consists of cycle stocks, or the inventory that is expected to be sold within a given period, and safety stock. Safety stock acts as a buffer amount that accounts for uncertainties such as:
What is safety stock and how can it improve inventory management?
Safety stock acts as a buffer amount that accounts for uncertainties such as: Safety stock mitigates the risks and consequences of stockouts, allowing your supply chain to proceed as usual even after cycle stock runs out. How Can Safety Stock Improve Inventory Management?
How to calculate safety stock?
Safety Stock = Z * sqrt {(Average Lead Time * (Standard Deviation in Demand) ² + (Average Sale * Lead Time Standard Deviation) ²} This formula takes into account variations in demand and supply. Step by Step Calculation Example
What is safety stock?
Safety Stock is defined as the additional quantities of goods stored as a safety net above the required amount to prevent going out of stock due to emergencies. An example of emergency is when sold off goods undergo damage on their way to be delivered. In such a case, safety stock can be used to ensure that the customer receives ...
Why are stocks bought and stored during good harvests?
During good harvests, stocks are bought and stored to keep prevent prices from falling below price levels or a target range, while stocks are released during harvests to prevent prices from rising above price levels or a target range. read more. and is obtained above the normal forecasted level.
What is a 95% service level?
A 95% service level means that there may be a stockout in 5% of the cases. A high service level increases the business’s cost to avoid stockout, but many firms do it nonetheless.
Why is safety stock important?
Importance of safety stock. Safety stock helps eliminate the hassle of running out of stock. If you hold sufficient safety stock, you needn’t rely on your suppliers to deliver quickly or turn away customers because of depleted inventory levels. Safety stock covers you until your next batch of ordered stock arrives.
What is fixed stock?
Fixed safety stock is a method used by production planners. They determine the amount of safety stock to keep from the maximum daily usage for over a period of time, but without using a particular formula. The value for fixed safety stock generally remains unchanged unless the production planner decides to change it. Fixed safety stock levels can even be set to zero for items that you want to phase out. However, if there is a sudden demand surge for an item with very little safety stock, you might not be able to fulfill the orders.
What is a Z score?
The Z score, also called the desired service factor, is a way to decide how confident you want to be about having enough stock. It is a value that you select so that you don’t face a stockout scenario. A lower score means you’ll have higher chances of running out of stock.
Can you set safety stock to zero?
Fixed safety stock levels can even be set to zero for items that you want to phase out. However, if there is a sudden demand surge for an item with very little safety stock, you might not be able to fulfill the orders.
Does Greasley take stock into account?
Greasley’s formula takes both lead time and demand fluctuations into account, which provides a more accurate way of calculating safety stock. But it doesn’t take into account stock which is still in production and not yet ready for sale.
WHAT IS SAFETY STOCK?
Safety stock definition is – Every retailer stocks inventory according to its customer’s average demand. Now, sometimes there can be a rush of sales. Meaning, you are soon going to be out-of-stock faster than you can replenish your inventory. This is for such situations that we need a safety stock.
SAFETY STOCK CALCULATION
Let’s first understand the terminologies used in the safety stock formula. Our retailer Jon advises retailers of today to know about these terminologies which goes like this:
3 (Jon-ey) Methods for calculating Safety Stock
Every business has its own methods of calculating safety stock. However, these methods are basically classified into three different styles; statistical-based calculation, time-based calculation, and fixed safety stock.
Economic order quantity (EOQ)
Economic Order Quantity (EOQ) is a method of calculating the quantity of the stock that needs to be re-ordered by taking into consideration the demand for that particular item/product and your inventory holding costs.
Reorder Level
Reorder level is the point where Jon replenishes his inventory in order to dodge the low inventory level. Below are the graphs, which shows the relation between
Service level and Safety stocks
In inventory management, the service level is the probability of not going out-of-stock during the next stock replenishment cycle, eventually helping Jon to reduce the count of lost sales.
Example and Case Study where Safety Stock comes into the picture
Let’s say your business is selling notebooks. On average, the daily selling of those notebooks is around 35. It takes approximately 7 days to replenish the stock again.
The Zero Safety Stock Model
The zero safety stock model is a very risky way to plan inventory since variations in demand and supplier delivery times happen every day and this makes our calculations merely estimates.
How to Calculate Safety Stock
Inventory planners keep safety stock to deal with this reality. Safety stock is a buffer of inventory to help deal with sources of variation. I’ve mentioned two of those sources already: variation in delivery lead times from your supplier and variations in the daily or weekly demand for this inventory item.
Sample Calculation
Let’s put some numbers in our equation to see how this works. Suppose we have a supplier that has been delivering this item to us, on average, in 14 days. However, over the last year, there have been deliveries of this item that have taken as much as 25 days to reach us.
How to Calculate Reorder Point
Adding our safety stock level to the lead-time demand gives us our reorder point.
Order Quantity
Using this method, how much do you order? I have said that the company likes to order 13 weeks of inventory. This order amount works in the case where you haven’t had to use any of your 4-week buffer to deal with sources of variation. However, suppose this company finds that it had to use 3 weeks of its 4-week buffer to deal with a surprise order.
Summary
Reorder points and safety stock levels are useful calculations to better manage your inventory, but sometimes access to the right data may force you to use an approximation for some of the values. Most companies can easily obtain daily or weekly sales data. It’s the variation in the supplier delivery times that is more difficult to obtain.
Reorder point vs. safety stock
Knowing how to manage inventory levels, determine precise reorder points, and refill inventories will give your company a competitive advantage.
Critical factors essential for the reorder level
It is essential to understand that the reorder point varies for each product and is heavily impacted by two crucial factors: daily sales velocity and lead time.
How to calculate reorder point and safety stock?
Keep in mind that if you purchase products and items too soon, you will have extra inventory that will cost you money to keep.
How to estimate safety stock?
To calculate safety stock, it is essential to have a purchase and sales order history. Once have the data on hand, you will simply need to utilize the following simple safety stock calculation: