In a perfect world, demand for products would be simple to calculate. In practice, even the most carefully crafted demand forecasts are impacted by unforeseen events. Disruptions occur due to raw material shortages, freight and logistic delays, unexpected demand, quality control issues, and more. Manufacturers, retailers, distributors, and government agencies must all contend with these challenges to ensure they can consistently meet the needs of their customers while also not holding excessive inventory. This is where a safety stock strategy needs to be considered.
Safety stock is essential in a supply chain to ensure businesses and organizations meet demand and mitigate the risk of a stock-out. Safety stock is an additional quantity of product held in the warehouse to act as a buffer in situations where, for example, replenishment deliveries are late (supply risk), or when actual demand exceeds the demand forecast (forecast risk).
Classifying products using ABC analysis should be undertaken first, to eliminate all non-stocked and obsolete items. The remaining products will require safety stock.
Now that the products which require safety stock have been identified, the next step is to calculate the quantities for each.
With Allsku, the safety stock level for each SKU is not a simplistic static value for a season. We automatically calculate precise values for each day to ensure that the safety stock levels are always optimized.
With our process, the following data points are needed to calculate these daily safety stock values:
• Examples of expected lead-times for replenishment orders • Projected monthly demand forecasts for this month and future months • The +/- percentage error for each monthly demand forecast • The percentage service level requirement for each month
Having a systematic and comprehensive approach means that the minimum of working capital is invested in safety stock, whilst ensuring that the chosen service level is maintained. This enables companies and organizations to better fund their existing operations and to invest in future activities and expansion.