# Just for Fun — a Safety Stock Quiz

This quiz is just for fun, but it’s more than just a quick spreadsheet-calculation exercise.

Inventory item XYZ needs to have its safety-stock level optimized. You can get all of the information you need for item XYZ at:

https://dl.dropboxusercontent.com/u/5975632/SS%20Quiz.docx (Word file) and https://dl.dropboxusercontent.com/u/5975632/SS%20Quiz%20Data.xlsx (Excel file).

As supply-chain/inventory-management experts, your skills and talents involve optimizing all facets of the supply chain. However, the specific focus of this quiz is safety stock, not inventory policy or overall supply-chain structure. Assume that XYZ’s parameters have been thoroughly analyzed and agreed-upon, and will not be changed for at least the next 12 months. The objective of this quiz is to determine XYZ’s optimal safety stock and resulting inventory position, not to propose different policies and parameters.

When you open those files, you may think I have provided too much information, but I want you to have sufficient detail to optimize XYZ’s safety stock level and inventory position. It’s up to you to determine what’s important and what’s not. This quiz is not simply a test of your ability to put values into a formula. On the other hand, some of the information has been simplified, to avoid being too stats-intensive.

## 2 thoughts on “Just for Fun — a Safety Stock Quiz”

1. Please find below my replies for the quiz:

1. What should XYZ’s safetystock level and/ortarget optimal inventory position be?
Average Consumption per Day= 100
Optimal inventory shall be = 100*9.1=910
Safety stock level shall be =0.3*910=273
2. What should we expect XYZ’s average quantity on hand to be?
1183
At any point in time, it’s unlikely that XYZ’s actual quantity on hand will be the same as its average. So:
3. What minimum actual quantity on hand would you expect to see?
Minimum Amount=7 Leadtime * 100 Average=700
4. What maximum actual quantity on hand would you expect to see?
Maximum Amount=14 Leadtime * 100 Average=1400

• Ibrahim,

Thanks so much for participating in this safety-stock quiz!

Yes, you’re right, XYZ’s historical average daily demand = 100, and its historical average lead time = 9.1 days.

I have some questions for you. Please don’t view my questions as argumentative or critical. I’m simply interested in fostering an informative discussion on optimal safety stock and inventory position.

My questions:
1. Why do you say that average inventory quantity on hand should be 1183, which is avg daily demand * avg lead time + safety stock? XYZ’s reorder quantity, or MOQ, is 2000. Theoretically (although theory doesn’t always apply), XYZ’s average QOH should be half of its MOQ + safety stock. This would be 1000 of cycle stock plus your 273 of safety stock, or 1273.

2. What is your logic for saying that safety stock should be 30% of avg daily demand * avg lead time? How do you know that this level of safety stock will achieve XYZ’s target service level of 98% for 11 months out of 12?

3. Why do you say that the minimum QOH would be 700, or minimum lead time * avg daily demand? The minimum QOH will be the quantity on hand just prior to the next receipt. My analysis says that the 2nd-percentile expected QOH will be 180.

4. Why do you say that the maximum QOH would be 1400, or maximum lead time * avg daily demand? The maximum QOH will be the quantity on hand just after a receipt, and the reorder quantity is 2000. My analysis says that the 98th-percentile expected QOH will be about 2600.

I’m eager to know your thoughts on this. Thanks again for joining the discussion!

David McPhetrige