Tag Archives: safety stock

Calculating Safety Stock

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Safety stock becomes necessary to help you avoid ‘stock outs’ if the rate of consumption increased and/or the lead time gets extended from the values considered for your replenishing system.

A simple way of establishing the safety stock would be to find out the above two variations that could normally occur over a period of time in terms of additional quantity of stock to be maintained. Lead Time is the time which supplier takes in ordering the items.]

1) When consumption Variation is very high:
Safety Stock = (Maximum rate of consumption – Normal rate of Consumption) X Lead Time.

2) When lead time Variation is very high:

Safety Stock = Normal consumption rate X (Maximum Lead time – Normal Lead time)

Safety stock is calculated using the following formula:
Safety Stock = (Maximum Daily Usage ? Average Daily Usage) × Lead Time

Reorder Points can be established based on the knowledge of your Safety Stock. The formula for the Reorder Point is as follows:

Average Lead Time X Average Demand + Safety Stock.

For a ready solution to your safety stock and reorder point needs, SIMMS Inventory Management software handles all of your needs. Visit www.simmssoftware.com or email sales@kcsi.ca.

Inventory Lead Times

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Lead time is the amount of time from the point at which you determine the need to order to the point at which the inventory is on hand and available for use. Accurate lead times are crucial in safety stock/reorder point calculations. If your forecasted demand during is 5 units per day and your lead time is 10 days your lead time demand would be 50 units. Accurate lead times should include manufacturer’s or supplier’s lead times, and should include time required to start the purchase order/work order processes (which include time needed for approval steps, supplier notification time, and the processing time for both receipt of goods and inspections for quality).

Most businesses examine their own demand fluctuations and assume that there is not enough consistency to predict future variability. They then fall back on the trial-and-error guesstimates or the over-simplified half-of-lead-time usage method to manage their safety stock. Unfortunately, these methods prove to be less than effective in determining optimal inventory levels for many operations. Therefore, if your goal is to reduce inventory levels but maintain or improve levels of service you need to give more detailed calculations a trial run. If there were a comprehensive method that worked for everyone, then it would be easier, but every business or industry includes variables that a single model cannot appreciate.

Much thought and planning can go into the timelines you wish to establish as lead times for your vendors. SIMMS Inventory Management software provides great diversity and considers that reorder points and lead time are most often specifically different for each of your locations/branches and that one vendor may have very specific delivery needs for a wide array of their materials. Analytical reports within SIMMS enable you to track the tendencies and will provide information you need to consider changing vendors for your most-needed items.

Visit www.simmssoftware.com or email sales@kcsi.ca for more information today.

The Functions of Inventory

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Inventory serves particular functions for the company that holds it. The most common categories of functions are as follows:

  • Anticipation inventory – stock you have on hand to fit a pre-conceived tally of sold stock (based either on weekly, monthly or quarterly amounts)
  • Cycle stock – stock that is involved in the standard receipt and sales process for sale to customers.
  • Hedge inventories – stock that is purchased to hedge against price increases and inflation. Salesmen commonly contact purchasing agents shortly before a price increase goes into effect. This gives the buyer a chance to purchase material, in excess of current need, at a price that is lower than it would be if the buyer waited until after the price increase occurs.
  • Safety stock (buffer inventory) – stock that is kept to cover instances where sudden rush or demand occurs.
  • Smoothing inventories – stock that is used to keep the revenue flow smooth within a system, best accomplished by using the LIFO valuation method.
  • Transit stock / pipeline inventory – additional stock that is on its way from manufacturers/vendors or is in transit between two locations within the supply chain.

 

Modern Inventory Concerns: Understanding Safety Stock

In an inventory model that might include Safety Stock, several terms and concepts come into play. These concepts are as follows:

Demand history – A history of demand broken down into forecast periods. The amount of history needed depends on the nature of your business. Businesses with a lot of slower moving items will need to use more demand history to get an accurate model of the demand. Generally, the more history the better, as long as the sales pattern remains the same.

Forecast – Consistent forecasts are also an essential part of the safety stock calculation. If you don’t use a formal forecast, you can use average demand instead.

Forecast period – period of time over which a forecast is based. The forecast period used in the safety stock calculation may differ from your formal forecast periods. For example, you may have a formal forecast period of four weeks while the forecast period you use for the safety stock calculation may be one week.

Lead time – the amount of time from the point at which you determine the need to order to the point at which the inventory is on hand and available for use. It should include supplier or manufacturing lead time, time to initiate the purchase order or work order including approval steps, time to notify the supplier, and the time to process through receiving and any inspection operations.

Lead-time demand – the forecasted demand during the lead-time period. For example, if your forecasted demand is 5 units per day and your lead time is 10 days your lead time demand would be 50 units.

Lead-time factor – a necessary value used to compensate for the differences between lead time and forecast period. The standard deviation was based on the forecast period, a factor is necessary to increase or decrease the safety stock to allow for this variance. A formula you can try is lead time factor = square root (lead time divided by forecast period).

Minimum Reorder Point – For slow moving products and especially if the lead time is short, you may want to program in a minimum reorder point which is the equivalent of one average sale.

Order cycle – (Replenishment Cycle) The time between orders of a specific item. Most easily calculated by dividing the order quantity by the annual demand and multiplying by the number of days in the year.

Order cycle factor – Longer order cycles result in an inherent higher service level you will need to use a factor to compensate for this. A formula you can try is Order cycle factor = square root (forecast period divided by the order cycle).

Reorder Point – the inventory level which initiates an order. Roughly, the reorder point equals the Lead Time Demand plus the Safety Stock.

Standard deviation – Term used to describe the spread of the distribution of numbers. Standard deviation is calculated by 1) determining the mean (average) of a set of numbers, 2) determining the difference of each number and the mean, 3) squaring each difference, 4) calculating the average of the squares, and, 5) calculating the square root of the average.

Knowlege of the above concepts and terms can better prepare you for inventory management at the highest level and will help you in your planning for boom periods and crunch periods that occur as the economy and business practices change over time. To learn how item replenishment plays a role in your business, contact KCSI today.

Stage Fright

Often the purchase of stock items requires some sort of clairvoyance to know the quantities that customers will want. SIMMS Inventory Management software will enable users to set up blocks of time — known as stages — during which such transitive items can be bought in advance of the systematic ‘rushes’ that occur throughout a financial quarter or term. Analytical reports on usage and inventory turnover can help the pattern be spotted long before the rush comes. Contact KCSI today to learn more.