Safety Stock Calculations January 29, 2007
Posted by Lawrence Loucka in : Definitions, Lean Sigma, Logistics, Sigma, Supply Chain , 2commentsWhen I first learned inventory planning the math was rather simple. On top of the cycle stock (expected demand during lead time) I would add a percentage or a number of days. Here’s a web app that uses this percentage approach. If the lead time was 2 weeks I might carry 3 or 4. I soon learned that demand for some inventory items is more volatile than others, and some suppliers less reliable than others. I’d either have too much or not enough, and I’d never get in trouble for having a little too much. So I started using (average demand * lead time) + (one sided Z factor * demand standard deviation) for the target inventory level; a little better approach.
Here’s another formula from Inventory Management Review; Safety Stock: {Z * SQRT (Avg. Lead Time * Standard Deviation of Demand ^2 + Avg. Demand ^2 * Standard Deviation of Lead Time ^2}.
Over at QuickMBA ; To calculate the safety stock, first calculate the standard loss function, designated as L(z). This function is dependent on the values of the desired fill rate f, the demand μ and its standard deviation σ , the time between orders p, and the replenishment lead time l : L(z) = ( 1 - f ) µ p / σ ( p + l )1/2. Once L(z) is known, z can be found in a look-up table and the safety stock can be calculated by: Safety Stock = z σ ( p + l )1/2
Here’s a new one recently published by Kent Linford in the APICS Magazine Nov/Dec 2006. SS = √ [( σFE)2 x (LTI/FI)beta + ( σLT)2 x D2] x Z x (FI/OCI)beta
Where:
SS = safety stock
FE = forecast error
LT = lead time interval
FI = forecast interval
pick a beta between 0.5 and 0.7
D = average demand during lead time
Z = normal distribution service factor based on desired service level
OCI = order cycle interval
Dave Piasecki at InventoryOps.com uses; safety stock = (standard deviation)*(service factor)*(lead-time factor)*(order cycle factor)*(forecast-to-mean-demand factor)
Jon Schreibfeder has anoher approach.
Got any other versions?
Backflush Definition November 27, 2006
Posted by Lawrence Loucka in : Definitions, Logistics , add a commentTraditional and standard costing systems track costs as products pass from raw materials, to work in progress, to finished goods, and finally to sales. Such systems are called ’sequential tracking systems’ because the accounting system entries occur in the same order as purchases and production. Sequential tracking is common where management desires to track direct material and labor time to individual operations and products.
The implementation of a just-in-time philosophy necessitates changes. Backflush is a single step inventory process that typically occurs and the end of a production line. To trigger the transactions a Work Order or Kanban card with a bar code or RFID tag are used. When a product is packaged into a box or carton the operator wands the bar code. This triggers several events:
- A Carton Label is Printed
- Open Quantity on the Work Order is reduced
- Materials on the bill of material are deducted from Raw Material Inventory
- Finished goods inventory is increased by the carton quantity and standard cost
- Cost of the Finished Goods is based on Standard Cost of materials, labor and overhead
Backflushing simplifies costing and inventory transactions since it ignores both labor variances and work-in-progress. While in a true just-in-time environment there would be no work-in-progress at all, there will, in practice, be a small amount of work-in-progress at any point in time. It is important that standard costs are close to actual costs to keep inventory costing reasonable accurate. Backflush accounting is ideally suited to a just-in-time philosophy and is employed where the overall cycle time is relatively short and inventory levels are low.
- Material Variances are calculated regularly through physical counts and the resulting inventory adjustments.
- Labor Variances are calculated monthly by comparing the labor absorbed at standard cost to the actual payroll expenditures listed in the GL accounts.
Certified Supply Chain Professional May 19, 2006
Posted by Lawrence Loucka in : Consulting, Logistics, Supply Chain , add a comment
The Certified Supply Chain Professional is the new industry certification program sponsored by the American Production and Inventory Control Society to meet the rapidly changing needs of the supply chain management field. The CSCP designation recognizes professionals who have demonstrated their knowledge and experience of supply chain management. Does your supply chain need a tune up? Not sure if your team is working on the right stuff? Do you want to catch up with your competitors, or take a left turn and cut them off?
Larry Loucka, CSCP
Kaizen isn’t an event April 14, 2006
Posted by Lawrence Loucka in : Consulting, Lean, Logistics, Supply Chain , add a comment“Kaizen, or continuous improvement, isn’t something you do once. It’s a way of life.” I said. The VP gave me a funny look. “OK let’s start from the beginning…”
This poor VP has a 600,000 sq ft distribution center on the west coast that had done two kaizen events a year ago. “We’re not getting the productivity we had designed.”
You know the rest of the story, right? Kaizen is a process, not an event!
Warehousing Maturity February 15, 2006
Posted by Lawrence Loucka in : Consulting, Logistics , add a comment
Recently a supply chain executive asked me to rate his warehousing operations. “OK, on what scale?” I said, trying to be honest and at the same time not insult this hardworking leader. Here’s what we came up with:
Level 1: Transactional / Reacting - inventory record accuracy, receiving, putaway, pick and pack, shipping
Level 2: Productivity - integrated RF barcode, pick waves, ASN’s, returns management
Level 3: Integration - cross docking, value-added services, global supply chain inventory visibility, transportation management, analytics
Level 4: Demand / Supply Chain - postponement, pull replenishment, merge-in-transit, VMI, customer collaboration, supplier collaboration, supply chain transparency, advanced demand data
Many operations I’ve visited over the past few years are operating at Level Zero; poor inventory accuracy, chronic treasure hunts and fire drills, low inventory turns, high excess and obsolete inventory. Warehousing operations are rarely the cause and often the victim of the lack of a holistic and systemic view of supply chain operations.
My supply chain executive was relieved to hear that his operations were better than most, but disappointed to realize that there was still a long way to go on the journey.