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Is your safety-stock level correct? To find out, take the TopDown Lean Systems safety-stock quiz.

The following questions will help you determine if your safety-stock technique is correct and optimal:

  • Does your safety-stock calculation require replenishment interval — MOQ, EOQ, ROQ, package size, lot size, etc. — and not just lead time?

    Why is this important? Replenishment Interval (RI) is determined by the inventory item's reordering parameters: MOQ, ROQ, EOQ, package size, lot size, reorder-review interval, etc. RI always corresponds to reorder quantity. The greater the RI, the more inventory is on-hand, and this provides a measure of ad hoc safety stock.

    RI and lead time are rarely, and only coincidentally, the same. RI not lead time — determines both receipt frequency and quantity. Yet popular safety-stock calculations require lead time, but not RI. These formulas unrealistically assume just one receipt per lead-time cycle.

  • Is your safety-stock formula fill-rate-based, and not simply event-based?

    Why is this important? Fill Rate is a quantity-based service-level measure, the ratio of demand quantity fulfilled on time to total demand quantity during a business cycle (month, quarter, year, etc.). Most businesses measure their actual service-level performance using a quantity-based fill-rate calculation. Yet many popular safety-stock calculations are event-based, not quantity-based.

    Event-based safety-stock formulas determine the probability of no stock-out events during lead time, not the demand quantity fulfilled on-time. You don't measure your actual service-level performance as no stock-outs during lead time.

  • Does your safety-stock calculation require your service-level business cycle time period (year, quarter, etc.), not just calculating service level during a lead-time cycle?

    Why is this important? Businesses measure their actual service-level performance over a period of time, a business cycle. Often, businesses set their service-level targets as annual fill rates, and their key performance indicators include actual fill-rate service-level performance for a one-year business cycle. (Quarterly and monthly cycles are also common.) Yet popular safety-stock calculations require only lead time, not business cycle, as an input.

  • Does your safety-stock formula require a factor for late demand being cancelled (no past-due backlog) vs. being shipped late, not merely defaulting to 100% cancellation?

    Why is this important? Many businesses serve markets and customers — both external and internal — that tolerate late demand fulfillment, and these customers do not immediately cancel this late demand. Instead of being cancelled, this demand becomes past-due, and carries over until fulfilled, often disrupting the fulfillment of other demand.

    Businesses in this situation experience a late-demand-cancellation factor of near 0%. Other businesses serve markets and customers that do not tolerate late demand fulfillment. Instead, these customers cancel their demand from the original supplier and fulfill that demand from another supplier. For the original supplier, this cancelled demand does not carry over as disruptive past-due demand.

    Businesses in this situation commonly face a late-demand-cancellation factor of near 100%. Yet popular safety-stock calculations do not require a late-demand-cancellation factor. Instead, they assume that late or unfulfilled demand is cancelled and does not carry over disruptively.

  • Does your safety-stock calculation determine the type of demand distribution, not simply employing normal-distribution calculations?

    Why is this important? Demand quantity has a lower limit. It cannot be negative; it must be zero or greater. On the other hand, it has no such upper limit. As a result, an inventory item's demand over a period of time does not form a normal distribution. Instead, its demand is skewed, and nearly always right-skewed.

    Importantly, the right side of the distribution is where the higher service levels reside. Yet popular safety-stock calculations assume a normal demand distribution. These safety-stock formulas do not represent your actual demand distribution.

  • Does your safety-stock formula determine demand intermittency, not just allowing intermittency to skew its results?

    Why is this important? Some of your inventory items experience demand (or usage) every day. Likely, however, the majority of your items do not, and a substantial portion experiences very sporadic demand — perhaps only a few days per month or even per year.

    Intermittency further skews the demand distribution. Yet popular safety-stock calculations assume no intermittency, and this assumption does not represent your actual demand patterns.

  • Does your safety-stock calculation thoroughly pre-screen your input data, identifying issues that may skew the results?

    Why is this important? Any calculation or analysis is no more reliable than is its input data, as implied by the truism "garbage in, garbage out." An inventory item's demand history likely contains non-random variation: trend, seasonality, cyclic and special-cause.

    These often result from introductions, phase-outs, market and economic cycles, distribution or outlet expansion or contraction, sales promotions, transactional errors, the effects of natural or man-made catastrophes and so on. If not pre-screened, identified and properly addressed, these non-random variations distort and skew any measure of random variation. Yet popular safety-stock calculations provide no pre-screening of their input data.

  • Does your safety-stock calculation provide the degree of confidence that the safety-stock level will achieve its service-level this year, or this quarter?

    Why is this important? For your hard-to-expedite items, you must have a very high level of confidence that safety-stock levels will achieve service-level targets in any given business cycle. Items that are easily and inexpensively expedited do not need such a high degree of confidence. The more confidence your items need, the higher their safety-stock levels must be.

  • Does your safety-stock formula provide expected actual-results ranges for KPIs such as fill rate, reordering, on-order and inventory velocity, so you may identify when your inventory items require safety-stock updates?

  • Does your safety-stock calculation recommend ROQ adjustments?

TopDown Lean Systems' LS3 Lean Safety Stock Solution answers "Yes" to all these questions. LS3 is a comprehensive, correct safety-stock analysis service, not an inadequate and simplistic calculation, formula, Excel file or spreadsheet.

If unquestionably reliable service levels and optimal inventory velocity are mission-critical for your company, call us for an initial discussion:

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