Safety stock amount is at best an afterthought, and at worst something rarely planned appropriately.
The fact is, safety stock is one of the most important settings in any supply chain. Not only does it mitigate risk, it’s also the best opportunity to increase your customer service while simultaneously reducing your inventory costs. While forecasts represent the quantity of your inventory you expect to sell, the safety stock portion (assuming a perfect supply chain and forecast) is never sold. It is bought, transported, handled, and stored, and therefore has a lot of cost associated with it. In a perfect world where forecasts are always correct, safety stock just sits around gathering dust; so while it may be a boring topic compared to the otherwise exciting world of supply chains, safety stock among the most important things to plan appropriately.
There are a few ways to set the amount of safety stock desired:
- First among these are a forward coverage, based on a desired mix of forecast, promotions, display, and presentation stock, and demand from bills-of-materials or subordinate locations in the supply chain. While this is a simple method, it’s simple because it’s a broad strokes approach and therefore not the most optimal.
- A second method is to use a statistical safety stock at a SKU level. This is a much better approach, as it addresses each individual SKU instead of making broad generalizations. However, it is still not the most optimal.
- The final and most ideal option is to utilize a statistical safety stock method that looks at the entire supply chain for a particular product. Working from this holistic view, it becomes apparent that for some products, most of the safety stock should be held at a Distribution Center, while for others, Store Safety Stock is more important. A good algorithm uses all of this knowledge (as well as all desired costs) to determine the appropriate safety stock amount for all SKUs at all locations.