In the past year, 25% of the search-term visits to our TopDown Lean Systems website have involved the words simple and/or Excel, usually associated with safety stock. Clearly, and understandably, businesses and individuals are looking for a better, easier safety-stock tool. When the word simple is included, the hope is that a simple calculation may not be perfectly precise, but it may be close enough. And, of course, Excel’s ad-hoc analytical abilities, combined with a simple calculation, could provide quick, easy, acceptably-correct safety-stock analyses and updates. So is simple also close enough?
Albert Einstein said, “Make everything as simple as possible, but not simpler.” How would we know if a safety-stock calculation is simple enough, but not simplistic, or too simple? First, let’s make a list of factors that our intuition tells us might affect safety stock:
- Target service level –higher service levels require more safety stock
- Lead time – longer lead times require more safety stock
- Demand variation – more variation requires more safety stock
- Lead time variation – more requires more safety stock
So far, so good. Most safety-stock calculations attempt to address these factors. But our experience tells us there are more factors. Here’s just one factor, and we’ll discuss more in following blog postings:
Service level type – Do you measure your actual service-level performance with on-time delivery (OTD)? OTD is a quantity-based fill rate, determined as demand quantity fulfilled on time ÷ total demand quantity.
Did you know that the z factor, or service-level multiplier, in a simple safety-stock formula does not represent OTD fill rate? The z factor represents a much harsher service-level measurement: the probability of no stockouts. The z factor is simple, but will it get you close enough?
Consider an example:
Say that your target OTD for item ABC is 95%. This means that if total demand was 20,000 units, 19,000 should be fulfilled on time. Now, compare this to a 95% probability of no stockouts for item ABC: Out of 100 order lines for ABC, 95 lines were filled on time with no shortages (in other words, no shortage events).
If each order line is for a quantity of 1, then OTD and the probability of no stockouts are the same. But what if the average order line is for a quantity of, say, 200? The probability of no stockouts is 95% when 95 lines are fulfilled complete and on-time, and 5 lines may be just one unit short.
In this example, 95% probability of no stockouts equates to an OTD of 99.975%! ((95 lines * 200 on time) + (5 lines * 199 on time)) ÷ 20,000.
99.975% OTD sounds great. But if your target is 95% OTD, the extra inventory (safety stock) required for the increased service level is excessive.
Do you measure your actual service levels using OTD or a similar fill rate?
Are you looking for a correct way to set safety stock, so that you achieve your service-level targets without unnecessary inventory?
Nothing could be simpler than sending us your data, and we will send you your correct, comprehensive and optimal safety-stock levels. Contact us for more info on how simple we can help make it for you!