Safety stock: a bulwark against uncertainty
In the complex world of inventory management, where demand variability and supply chain hazards are commonplace, safety stock is a bulwark against uncertainty. A real safety net for companies, it enables them to deal with the unexpected and maintain an optimum level of service.
In this article, we will explore in detail the concept of safety stock, its role, how it is calculated and the best practices for making the most of it.
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What is safety stock?
Safety stock, also known as buffer stock or reserve stock, is a quantity of product in excess of forecast demand. Its main role is to absorb unforeseen variations in demand and fluctuations in supply lead times, in order to avoid stock-outs and maintain a satisfactory level of service for customers.
Unlike active stock (or current stock), which is regularly drawn down, safety stock is only used when needed, when actual demand exceeds forecasts or supplier deliveries are delayed. It acts as a buffer, enabling the company to continue operating normally despite unforeseen events.
Safety stock meets a number of challenges:
- Guaranteeing product availability: by building up a sufficient safety stock, the company ensures that it can meet customer demand even in the event of an unforeseen peak or delivery delay.
- Maintain a high level of service: the safety stock helps to limit stock-outs and therefore avoid lost sales and dissatisfied customers. It also helps to preserve customer reputation and loyalty.
- Reduce logistics costs: by avoiding emergency situations and special orders, safety stock enables better planning of supplies and economies of scale. It also helps to reduce transport and handling costs.
However, safety stock also represents a cost for the company, as it ties up financial resources and requires additional storage space. The challenge is therefore to find the right balance between the desired level of service and the cost of stocks, while limiting the amount of sleeping stock.
The different types of safety stock
There are several types of safety stock, depending on the origin of the contingencies they are intended to cover. They can be linked to :
- Demand: in this scenario, the aim of safety stock is to absorb unforeseen variations in customer demand, whether one-off peaks or upward trends.
- Supply: to cope with late deliveries from suppliers, whether due to production, transport or quality problems.
- Production: safety stock is essential for dealing with unforeseen events within the company, such as machine breakdowns, quality problems or unexpected production stoppages.
Each type of safety stock meets specific challenges and requires a tailored approach in terms of sizing and management.
How to calculate safety stock?
The calculation of safety stock is based on three key parameters: the variability of demand, the lead time and the desired level of service. The most commonly used formula is as follows:
Safety stock = Safety factor * Standard deviation of demand * √leadtime
The safety factor is determined on the basis of the desired service level, i.e. the probability of being able to satisfy customer demand. For example, for a service level of 98%, the safety factor is 2.05 (according to the normal distribution table).
Let’s take a concrete example to illustrate this formula:
Let’s imagine a company that sells office supplies. The average demand for a given product is 500 units per month, with a standard deviation of 100 units. The lead time is 2 months and the company wants to ensure a service level of 98%, which corresponds to a safety factor of 2.05.
Applying the formula, we obtain :
Safety stock = 2.05 * 100 * √2= 290 units
This means that in order to cope with the vagaries of demand and supply, while maintaining a service level of 98%, the company must keep a safety stock of 290 units for this product.
It is important to note that this calculation is based on a number of assumptions, in particular a normal distribution of demand and the independence of variations from one period to the next. In reality, these assumptions are not always verified and it may be necessary to adjust the model according to the specificities of each situation.
Best practice for optimising safety stock
To get the most out of your safety stock, there are a number of best practices to follow:
1. Segment products
Not all products have the same strategic importance or the same demand variability. It is therefore a good idea to segment your stock according to criteria such as turnover, margin, criticality or variability, and to adapt the level of service and the method of calculating safety stock accordingly.
2. Monitor performance indicators
Regular monitoring of indicators such as service rate, number of out-of-stocks or stock coverage enables you toassess the effectiveness of the safety stock and adjust the calculation parameters if necessary. These indicators should be analysed by product and by period, and compared with the targets set.
3. Working with suppliers
The quality of forecasts and the reliability of supplies are key factors in optimising safety stock. By working closely with suppliers, sharing information and synchronising flows, we can reduce uncertainties and better anticipate requirements.
4. Use forecasting tools
To determine the optimum level of safety stock, it is essential to have reliable demand forecasts. The use of statistical tools and forecasting algorithms, integrated into inventory management software, enables calculations to be automated and more accurate.
5. Adjust parameters regularly
Market conditions, customer behaviour and supplier performance are constantly changing. It is therefore necessary to regularly review the parameters used to calculate the safety stock (lead time, demand variability, service level) to ensure that they remain relevant.
Conclusion
Safety stock is a fine-tuned inventory management strategy: it enables companies to cope with unforeseen events and maintain a high level of service. To get the most out of it, it is essential to understand how it is calculated and to put in place appropriate good management practices.
By relying on high-performance forecasting tools, fine-tuned product segmentation and close collaboration with suppliers, companies can optimise their safety stock and strike the right balance between customer service and logistics costs.
Safety stock is just one aspect of inventory management, but it is essential for ensuring business resilience and performance. By mastering this key aspect, companies can ensure that they can navigate serenely in an increasingly uncertain environment and satisfy their customers’ expectations, without sacrificing their profitability. It’s a major challenge, but one that is within everyone’s grasp, given the right tools and methods.
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