Safety Stock

Inventory Management ExplainedLike forecasting, effectively calculating your safety stock requirements can result in getting greater performance out of less inventory. Unfortunately, most businesses do a lousy job of calculating safety stock. Safety stock is used primarily to compensate for demand variability that cannot otherwise be calculated as part of your forecast. This seemingly random variability is called noise, and while we can't predict with certainty exactly when it will happen, we can estimate how frequently certain levels of variability will occur. We can do this through the use of statistical tools. We can then use this information to plan safety stock levels that will meet our fill-rate requirements while minimizing our inventory investment.

But we can't do this if we don't understand the statistical theory behind the tools we are using. That's because, in order to apply these statistical methods to our business, we need to modify them to fit our particular needs.  In Inventory Management Explained you will learn:

  • Why Keep-it-simple methods for calculating safety stock don't work.
  • The problems with oversimplified applications of statistical safety stock calculations.
  • What the Normal Distribution model is, and why it applies to safety stock calculations.
  • Exactly what a Standard Deviation is.
  • Where those "safety stock tables" you may have seen in other books come from and how to calculate your own.
  • Why the "service level" element of statistical safety stock calculations may not be what you think it is.
  • How to modify your safety stock calculation to account for your forecast, lead time, and order cycles.
  • How biased forecasts and negative variability affect statistical safety stock calculations.

This is all done through spreadsheet examples combined with plain English explanations.

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