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Why "Simple" Is Dangerous

Safety stock is not simple. When you need to balance your inventory levels and customer service to maximize your financial results, a "simple" or Excel-based safety stock calculation is dangerous!

You need safety stock for your random variations in demand and replenishment lead time — the unforeseeable timing of spikes, dips, intermittency, delays. This randomness is measurable, but it's not simple, especially when you're dealing with complex MRP parameters — MOQ, EOQ, ROQ, min-max, package size, etc.

There are plenty of simple safety-stock calculations, but beware! They're too simple to optimize both inventory and fill rate. For example, you've seen this popular, common safety stock formula for random variation:

Safety Stock =
        Std DevDemand * √Lead Time
          * z [target-service-level multiplier]

This safety-stock algorithm — and its more complex variants — are NOT elegantly simple. They are dangerously simplistic.

A simple formula in an Excel-based spreadsheet won't take you to your customer-service-level and inventory-performance goals. It won't give you a 10-1 or better return on your investment. For that, you need our LS3 Lean Safety Stock Solution, a comprehensive approach to safety stock analysis.

You face at least six real-world issues that a "simple" safety stock formula cannot address:
  • A simple formula ignores MRP parameters, as if they weren't important.
  • A simple formula assumes that your world is normal and steady, so it doesn't take non-normal demand patterns into account. A simple normality-based formula gives you unreliable results.
  • You measure your service level as a quantity-based fill rate, but a simple formula measures service level as the probability of no stockouts, ignoring this fundamental and important difference. Introducing a fill-rate factor to the formula merely makes it more complex, not correct.
  • You know that past-due demand or usage often carries over, making other demand late — but a simple formula assumes that this doesn't happen.
  • Because a simple formula ignores fill rate, skewed demand patterns, MRP parameters and carry-over demand, it cannot provide you with reliable expected service-level and inventory-performance results.
  • Some of your customers and inventory items cannot be profitably expedited. They demand the highest confidence that they will consistently meet service-level targets. A simple formula cannot provide this confidence.
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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