The 6 primary factors that affect safety stock are:
• Demand Variation
• Lead-time Variation
• Replenishment Interval
• Customer Service Level
• Probability of Order Cancellation vs. Backlog
• Cost of Expediting
Does Your Unfulfilled Demand Become an Order Cancellation, or Past-Due Backlog?
If you are a retailer, or if your product is a commodity, your customers may cancel the portion of their orders that you cannot fulfill on time. If so, you may face a 100% probability of order cancellation for unfulfilled demand. By contrast, your customers may tolerate occasional late fulfillment – a classic on-time-delivery situation – and that late quantity becomes past-due backlog until you are able to fulfill it. If this is true, your probability of order cancellation may be 0%. Quite possibly, your individual inventory items may experience order-cancellation probabilities of something in between 0% and 100%.
If your business exists in a past-due-backlog market, you know just how disruptive past-due backlog can be. Effectively, it often results in a cascade of lateness, as illustrated by the example in the figure below. In that example, a past-due quantity of 25 causes an additional quantity of 5 to be late.
What if your customers will not tolerate past-due backlog, and they instead obtain the balance of their order from a competitor? Even in this case, you would like to fulfill nearly all of their demand quantities, minimizing demand lost to your competition. This means that your actual service-level measurement is still a quantity-based fill rate during a business cycle, not a probability of no stock-out events during a lead-time cycle.
