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Safety stock = (Maximum daily usage * Maximum lead time in days) –

(Average daily usage * Average lead time in days).

When dealing with uncertainties and multiple


variables, the best way to calculate safety
stock is to use standard deviation for determining
variations in supply and demand.

Z  × σLT × D avg

Z is the desired service level, σLT is the standard deviation


of lead time, and D avg is demand average.

calculating safety stock only requires a four-step process to calculate these


variables.

1 | Calculating Lead Time

Lead time is the time between initiation and completion of a production


process, or the time it takes in total to replenish stock.

https://www.skuvault.com/blog/safety-stock-formula/

2 | Calculating Demand

3  | Establishing Service Level

The higher the desired service level, the more safety stock
needs to be held.

4 | CALCULATING SAFETY STOCK

Z × σLT × D avg.
Reorder Point
(Average daily unit sales x Delivery lead time) + Safety Stock( x % of lead time demand)

Reorder Point = Lead Time Demand + Safety Stock

Ideally, all companies should adopt a math-based approach to determining safety


stock. This means applying and customizing safety stock formulas to meet business
needs based on historical data. To take this approach, companies must pull the
following information from their warehouse management system:

 Expected product lead times: The number of days within which suppliers
promise to fulfill orders
 Actual lead times: This is the number of days it takes for suppliers to actually
fulfill orders
 Customer demand: How many units of your product you sell in a given time
period

While there are variations, we’ve provided the simplest safety stock formula below as
well as a step-by-step guide on how to implement it.

Safety Stock Equation = Z × σLT × D avg


https://www.logiwa.com/blog/safety-stock

Rappold and Yoho (2014) introduced an optimisation model to determine


safety stock levels that minimise long run expected costs and optimise item-
level planning parameter such as lot size, safety stock and lead time in MRP
systems. Khader, Rekik, Botta-Genoulaz, and Campagne (2014) studied the
impact of inventory inaccuracies on the performance of an inventory
management system where the demand satisfaction is mainly based on the
inventory position which could be subject to errors and might not represent the
actual stock physically available. They provided an analytical optimal ordering
solution for the problem concerning the impact of errors on the optimal
ordering policy.
Total Stocking Level = Supply variability + Demand variability = Uncertainty = Variability
Buffer
Most statistical models on inventory fail to work operationally because they focus
exclusively on “deviation of demand”. There are two additional criteria that must be taken
into account replenishment lot size and supplier lead time
George Plossl has an interesting observation as to how safety stocks are
often set that conforms with my experience at numerous clients.
“Guestimates: Guestimates are probably the most frequently used, being easiest to apply,
and are based on planners’ frequent personal judgement. They usually increase immediately
after a shortage occurs but are rarely decreased.

Rules of Thumb: These are equally irrational, and require additional work to apply. A
popular one bases SS on A-B-C inventory classification; expensive A-items should have
little, moderate B-items some more, and low-cost C-items plenty. This ignores the
protection furnished by lot sizes in excess of immediate requirements; C-items usually have
very large order quantities and short replenishment lead times; they may not even need
safety stock. Conversely, A-items are exposed more frequently to stock outs because of
frequent reordering.”

The Dynamic Safety Stock formula segments:

 Service level portion of the formula

https://www.brightworkresearch.com/sapplanning/2012/04/08/the-issues-with-the-use-of-
dynamic-safety-stock/

1. Service level portion of the formula :


Uisng the inverse of normal distribution But this cannot be used for
low volume demand as arrival of demand for low volume demand is
not normally distributed. This provides the ratcheting effect
consistent with increase or decrease of service level.
The standard dynamic SS formula does not use a forecast error, but instead a standard
deviation of demand. However, when you create a custom dynamic SS formula, one can use
forecast error. This has advantages in that forecast error is far more often discussed
within forecasting departments and companies generally regarding the forecast than the
standard deviation of demand.

 Beutel and Minner (2012) presented an integrated framework for demand estimation and
safety stock planning. Number of different factors such as price and weather were
considered, the framework was based on causal demand forecasting and error estimation as
well as a linear programming.
 Rappold and Yoho (2014) introduced an optimisation model to determine safety stock levels
that minimise long run expected costs and optimise item-level planning parameter such as
lot size, safety stock and lead time in MRP systems.
 Khader, Rekik, Botta-Genoulaz, and Campagne (2014) studied the impact of inventory
inaccuracies on the performance of an inventory management system where the demand
satisfaction is mainly based on the inventory position which could be subject to errors and
might not represent the actual stock physically available. They provided an analytical optimal
ordering solution for the problem concerning the impact of errors on the optimal ordering
policy.
 Kumar and Evers (2015) examined the impact on safety stock when accurate record of
demand during the lead time is compromised and they proposed an alternative formulation
for setting safety stocks using a multiplication approach for estimating the variance using
data aggregated over lead time. One of the advantages of this approach is its resilience but it
will be limited by the coefficient of variation of the lead time
 Steinker, Pesch, and Hoberg (2016) showed that the magnitude of inventory reduction under
financial distress depends on many factors such as firm size and turnaround strategy which
in my opinion contribute to the way forward for the firms in identifying their priority in
handling their inventory and stock level
 The stock keeping is strongly connected with the cost, Mascle and Gosse (2014) presented a
concept to deal with large number of products which variants considerably and complicates
the inventory control process
 Rappold and Yoho (2014) introduced an optimisation model to determine safety stock levels
that minimise long run expected cost to support sales and operations planning during the
lead time which is useful for tactical planning
 Amirjabbari and Bhuiyan (2014) developed a non-linear cost optimisation safety stock model
in lean environment aiming to identify the optimal level of safety stock. Their model is
presented through different value streams of each finished product family of the company
involved in their research and utilised lingo optimisation software but they have to limit the
number of stages considered in the model for simplification purposes
 Charnes, Marmorstein, and Zinn (1995) developed a model that considers the periodic-
review inventory replenishment policy to control the stockout rate when the autocovariance
function for Gaussian demand is known from historical data.
 There are many other published research articles in the area of safety stock with variability
in both lead time and demand such as Eppen and Martin (1988) used exponential smoothing
technique to estimate the demand and also estimate the distribution for the lead times.
 Persona, Battini, Manzini, and Pareschi (2007) proposed two equations to calculate the
safety stock for assembly to order and manufacturing to order production systems relying on
the usage of modular products and super bill of materials within which the variation in the
modular is considered to determine safety stock levels of subassemblies or components
taking into consideration the service levels. The work reviewed in the above three
mentioned articles differ from the work proposed in this paper from the prospective of the
new proposed mechanism which allows efficient configuration of the ERP Safety stock
parameters, the two different replenishment policies that can be used based on
replenishment conditions whether the stock on hand is less than target stock level (TSL) or
less than reorder point (ROP), see Table 1 for more details.

http://shura.shu.ac.uk/16277/1/Saad%20Development%20of%20a%20mechanism%20to
%20facilitate%20the%20safety%20stock.pdf

SAP advanced tool - The advanced methods are dynamic because safety stock levels are recalculated
at item level based on the latest demand profile, forecast accuracy and service level required.

Effective inventory management is based on balancing:

 reducing lead time and minimising the risk of stock out occurrence
 inventory costs by minimising stock holdings
 operating costs by defining efficient batch quantities and frequency of production
o According to Gilmore (2008), this balance can be achieved through the application of
inventory optimisation models.

The actual times of production orders are the main inputs for the lead time calculation. Due to the
variability of order quantity produced in every batch, it is necessary to establish a base quantity
order to identify the variability in production times.

Parameters associated with lead time:

 Actual times of production


 establish a base quantity order to identify the variability in production times
 determine the nominal value of the lead time in order to consider the tendency of the value
obtained (PERT method)

https://www.lokad.com/service-level-definition-and-formula#Cost_function_2
Service level (inventory) represents the expected probability
of not hitting a stock-out. The service level represents a trade-
off between the cost of inventory and the cost of stock-outs
(which incur missed sales, lost opportunities and client
frustration among others).
The optimal service level is given by (the reasoning is
detailed below):

Where Φ is the cumulative distribution function associated to


the normal distribution. This value can be computed easily in
Excel, ΦΦ is the NORMSDIST function. Also, for sake of
numerical computation: 2π−−√≈2.502π≈2.50

The first interesting aspect of the formula is that the optimal


service level only depends on HH (inventory cost)
and MM (stock-out cost). However, there is an implicit
dependency on the lead-time as HH has been defined as the
carrying cost for the duration of the lead time.

https://pdfs.semanticscholar.org/98b7/5ecc0cd653b5620180aab79f4024f9726016.pdf
Service Level - In inventory management, service level is the expected probability of not hitting a
stock-out during the next replenishment cycle or the probability of not losing sales.

The safety stock level must be high enough to cover vendor’s delivery times, sufficient
enough to cover customers’ demand, but not so high that your company loses money because of
high carrying costs.
Service Level – the number of quantities delivered in time/ the total
quantity demanded
Safety stock is defined as inventory that is carried to prevent stock out and back order situations.
Safety stock protects against various deviations, such as delivery date variances (when the
replenishment lead time varies), requirement variances (when the forecast is inaccurate) delivery
quantity variances (when the vendor does not deliver enough materials or the quality of delivered
materials is poor) and inventory variances

The safety stock can be calculated either based on historical distribution of demand or on the basis
of a future distribution of the demand (forecast error). The formula for the standard method is as
follows:

Safety stock = safety factor * average replenishment lead time ( The formula assumes that the
demand is distributed normally during the replenishment lead time)

According with Percentage method the safety stock be calculated as follows:

Safety stock = average consumption * average replenishment lead time *safety factor ( The
safety factor is between 20% and 40%)

The reorder point (ROP) is the level of inventory which triggers an action to replenish that


particular inventory stock. It is a minimum amount of an item which a firm holds in stock,
such that, when stock falls to this amount, the item must be reordered.

Safety Stock
1.
If the lead time, order cycle time and forecast period were all the same and if the forecast was the
same for each period and equal to the mean of the actual demand for those period, this formula
would work great.

2.

3.

4.

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