5 Questions About Safety Stock Calculations

Companies calculate and keep safety stocks as part of their overall inventory management as a matter of best practice. The science is not new; almost every commercial supply chain planning software enables at least one version of safety stock calculation. There is a range of methodologies available out there, based on:

• Period coverage (backward or forward)
• Normal distribution
• Bootstrapping
• Optimization-based (linear programming) methods

Over the years, I have had doubts and questions about these methods. Lately, I have also been fielding questions on safety stocks on LinkedIn. Some of these questions are similar to ones I have had over the years; others can lead to a lot of head-scratching. Here is a sampling of questions about safety stock, some from recent times and some from the past:

• I have always used 3 periods of demand as my safety stock. What is wrong with that?
  • You probably have too much safety stock.
• My customer gives me a long lead time on their orders. How best to account for this in the safety stock calculations?
  • Lucky you! You may need less safety stock.
• My supply is not always reliable – I do not always get what I order. How best to account for this in my safety stock calculation?
• My suppliers have quality issues. On average, only 90% of the product received is usable. Should I account for this in my safety stock?
• I have heard about the cycle service level and the fill rate service level. Which should I use? (more on this here)