When you need to maximize your financial results by balancing your inventory levels and customer-service performance, a “simple” or Excel-based safety-stock calculation may seem to be the right choice, but it can be dangerous!
You need safety stock for your random variations in demand and replenishment lead time — the unforeseeable timing of spikes, dips, intermittency, and delays. This randomness is quantifiable, but it’s not simple, especially with complex MRP parameters — MOQ, EOQ, ROQ, min-max, package size, etc.
There are plenty of simple safety-stock calculations but beware; they are too simplistic to optimize both inventory and fill rate. For example, you’ve seen this popular, common safety-stock formula:
You face at least six real-world issues that a “simple” safety-stock formula like this 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. Yes, you can introduce a fill-rate factor to the formula, but this 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 inventory items cannot be profitably expedited, and some of your customers will not accept expediting. They demand the highest confidence that they will consistently meet service-level targets. A simple formula cannot provide this confidence.
We will take a look at each of the above issues, as they relate to current safety stock calculation methods, in a future blog entry.
We invite your comments, and look forward to the discussion.