Comments on: Safety Stock Calculations

By: Lawrence Loucka

Lawrence Loucka — Thu, 22 Sep 2011 06:55:48 +0000

Paul, think about time fences and reaction time. For example, can you make a change to your demand forecast +/- 25% due twelve months from now? Can your supplier go +/- 5% in 15 days. How big is your ‘frozen’ zone – the next 3 months? Can you make demand changes in month 4? So for safety stock how much will actual demand vary in your frozen zone? This is the safety stock you need. Don’t need safety stock for month 12. OK?

By: paulw

paulw — Wed, 21 Sep 2011 22:20:59 +0000

What I am struggling with is how to adequately figure that reaction time if I have suppliers that are producing and delivering in a regular frequency i.e. weekly, biweekly. I have some suppliers that have pretty long lead times and so if I use the full mfg and transportation lead time the safety stocks (minimum we want them to have on site) can get pretty high. If I have a supplier that has a 3 month lead time but receives a rolling 12 mo forecast and is replenishing inventory on our site weekly would we use a week or 3 months? This could obviously mean they are producing more than they deliver and holding stock and then just shipping to us weekly or they are producing a new batch every week. Appreciate your suggestions.

Thanks

By: Lawrence Loucka

Lawrence Loucka — Thu, 15 Sep 2011 18:03:28 +0000

Paul, if supplier is making to forecast why do you need safety stock? Usually because your forecast is wrong and you need to have the supplier make a change that’s not reflected in the forecast. So then, as you suggest, you would use the “reaction time”. You could include in the lead time your time to recognize the actual demand deviation from the plan/forecast, plus the time to communicate the new demand, plus the supplier’s lead time (manufacturing and transportation time for example).

By: paulw

paulw — Thu, 15 Sep 2011 16:57:44 +0000

Working on a VMI program with suppliers and evaluating minimum inventory to be maintained. How do you figure lead time for calculating appropriate inventory levels (min, max, etc.) for a supplier that is making to a forecast you provide them? Do you use the lead time it would take for a discrete PO being issued to delivery to your dock, just the delivery time from the supplier to you, or something else.

Thanks

By: abhishek5380

abhishek5380 — Fri, 05 Aug 2011 17:42:06 +0000

Dear Lawrence, thanks for your response. Regarding the breakdowns, if we look into the past data, than few months back this was the major issue. And the breakdowns were like punching tool break down or machine breakdown. These issues are already taken care. Regarding capacity, supplier is having enough capacity in accordance with the demand.
Presently issues with supplier are that whatever supplier is making them are they are supplying on same or next day. So in case there is any issue in production due to any reason or lot get rejected by Final SQC or delay is delivery, than this directly impacts the production at our OEM resulting in miss order. Our experience in the past was so bad that the as a first step we would like to define the safety stock so that chance of order miss get minimized. Once the supplier process get streamlined & confidence get built in supplies this buffer stock qty will be reduced to zero (as keeping inventory is just like keeping you money ideal). Another reason for keeping safety stock is that presently this supplier is supplying 80% of total requirement. Development of alternate source is already is in progress.
Regarding keeping inventory at our end than we are planning for having 3 days advance planning result in 3 days inventory at our OEM end. Need your inputs on this also.
Regarding order placing, we raised the week’s requirement & supplier supplies material distributed throughout the week. Target was to complete week order by the end of week. (This can be from 4 days to 6 days or some times even supply by end of week day due to which our OEM struggles in production) And if talk about the lead time than 3~4 days is the production lead time for component & 1 day is travelling time.

Thanks…..

By: Lawrence Loucka

Lawrence Loucka — Fri, 05 Aug 2011 13:22:36 +0000

Adhishek, lean thinking says that inventory is muda (Japanese for waste). When we put safety stock in place we cover up the causes. Your supplier has breakdowns and is unreliable. One approach is to add inventory safety stock, the other approach is to go to your supplier and try to help reduce breakdowns. Maybe the supplier needs preventive maintenance. Maybe the supplier needs some capital?

If you must put safety stock in place right now then you need to have some history on the supplier’s variation in lead time (including breakdown duration and frequency). Safety Stock is used to disconnect your customers, your operation, and your supplier. Safety Stock can help deal with variation in demand and supply. It can be helpful to split these two. Some of your safety stock can be for buffering changes in your customer orders, some can be for changes in supplier leadtime. Find out all the steps from needing materials from your supplier until those materials are available: reorder trigger, create purchase requisition, approval, create purchase order, notify supplier, negotiate delivery date, manufacture, transportation, receiving, inspection, putaway, requisition, etc. all these take time and have variation in time. If you have some history or can make some estimates then your safety stock can be 1 or 2 standard deviations on the high side of the lead time variation.

If the supplier can’t carry safety stock, can you? Once you have some safety stock you might then be able to get the supplier to do the same.

By: abhishek5380

abhishek5380 — Fri, 05 Aug 2011 12:44:53 +0000

Hi All…
I’m new to this forum, so first i give my small intro….basically a mech. graduate & having a exp in manufacturing industries. Presently working as a Black Belt to improve Customer service level in SCM.
In regard of my project i need few inputs from the experts as I’m new to SCM.
My issue is that our supplies to customer are hitted by non performance of our one of supplies. Main reason why our supplier is not able to cater the demand is due to some breakdowns etc…. issues. Another thing is that he has no Safety stock of finished goods material with them to take care of any such breakdown or uncertainty. We have asked him to keep safety, but the safety stock figure given to him is not scientifically calculated. Before further getting into other issues with supplier I want to define safety stock at his end which is based on some scientific calculations.
Pl help is calculating the desired safety stock…..

Thanks in Advance….
abhishek

By: David McPhetrige

David McPhetrige — Thu, 04 Aug 2011 01:11:22 +0000

Rajesh,

My advice is to contact Kent Linford via the email link on his name, above. Also, you can contact Dave Piasecki directly through his InventoryOps Website. I know Kent will answer your email, and I’m sure Dave will, too. I’m confident that their explanations of their formulas will be better than mine.

We have several white papers that discuss forecast error, order cycle (replenishment interval) and the other factors that affect safety stock, service level, inventory performance and expediting costs at http://www.topdownleansystems.com/white.htm.

David McPhetrige
TopDown Lean Systems, LLC

By: rajeshsubra

rajeshsubra — Wed, 03 Aug 2011 13:56:00 +0000

Dave and Lawrence,
Thanks – this is a good compilation of formulae which covers most usage.
I am trying to build the order cycle factor into my safety stock calculation, and just wanted to quickly check on a couple of things with you.
- I like Dave Piasecki’s formula, but unsure how exactly it is used – if a company does monthly forecasts and uses a 2 year rolling forecast and foreceast accuracy in its error calculations, would the forecast period by 1 month, or 2 years? And the order cycle itself is the time between orders, or is it the number of orders per time period? i.e. if a company orders an SKU every 15 days, would this factor be 0.5 months or 2 times a month? the latter seems more intuitive, since more times you order, the lesser will be the safety stock needed….Would be great to see an example here to explain the logic
- In the Kent Linford formula, how is FI and OCI defined? Is it similar to the above?
- Is there any other method in this case?
Thanks!
Rajesh

By: David McPhetrige

David McPhetrige — Sun, 24 Jul 2011 18:10:08 +0000

Verrami,

We can help you with your safety-stock analysis, and we can handle your large number of inventory items. It’s what we do. I invite you to contact me through our Website, at http://topdownleansystems.com/contact.php.

David McPhetrige
TopDown Lean Systems, LLC