The minimum quantity is equal to the anticipated demand during the lead time. But will we always sell one piece per day? Will the lead time occasionally exceed the longest normally anticipated lead time? Many distributors want to maintain some reserve inventory to avoid stockouts in case of unusually large demand or unanticipated supplier shipment delays during the lead time. This insurance inventory is known as safety stock:
There are several ways distribution systems determine safety stock quantities. These include:
• A percentage of the anticipated demand during the lead time
• A specific quantity or a certain number of days’ supply
• A multiple of the average difference between the demand forecast (prediction of what you will sell or use) and actual usage during the last several months. If your system uses this method be sure it only considers instances where actual usage exceeded the forecast. If the forecast exceeded usage you don’t need safety stock. You already have too much of the item.
Some items require more safety stock, such as critical items and those that consistently have a high forecast error. Other products require less safety stock. These include products with very predictable demand and those that will not result in dissatisfied customers if they happen to be out of stock. Like any type of insurance, safety stock is an expense, not an investment. Whatever method you use to determine safety stock quantities, be sure you only keep enough safety stock to maintain your desired level of customer service.
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