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One of the factors in safety stock calculation is average demand. However, since average demand changes every month how often should I revisit the formula? I use a periodic ordering system by the way.
The frequency of the safety stock changing should ideally be same as the ordering.
Every time the new order is placed the safety stock level should be reviewed.
In most cases it can be monthly/ quarterly as per the purchase/order cycle.
Most companies rationalize that safety stock is the domain of those companies who run a Min/Max inventory system. However, maintaining safety stock isn’t just something that companies do when faced with cyclical and seasonal customer demand patterns.
Maintaining a safety stock is an essential part of capturing opportunistic sales, retaining business and properly servicing customers.
In fact, some companies measure their excellence in customer service by their ability to maintain their safety stock. The focus is to never encounter lost sales due to inventory stock outs. Customer service is then measured on the number of successful orders shipped to customers.
Maintaining a safety stock is pivotal to this success and a vital aspect of retaining market share.
So, what are the steps to determining your company’s safety stock?
When thinking of your company’s safety stock, think of how much product must be retained within your inventory in order to never miss a sale. In this case, your safety stock must be high enough to cover your vendor’s transit time on new shipments. This transit time is the most important portion of your inventory replenishment time and is critical when determining safety stock levels.
Your safety stock must cover the transit time on delivery from your vendor to your location. In essence, if you allow your inventory to run to zero before you’re able to secure your next shipment, then your company will lose business. It’s just that simple.
Maintaining safety stock doesn’t just mean covering the transit time on shipments from your vendor. It also means accounting for your customers’ average consumption during that period.
As important as it is to cover your vendor’s delivery times, and account for daily customer consumption, you must also recognize that holding too much inventory will reduce your company’s gross profit.
Therefore, your safety stock level must be high enough to cover your vendor’s delivery times, sufficient enough to cover your customers’ demand, but not so high that your company loses money because of high carrying costs.
It’s a balancing act for sure, but it does work. Companies make it work all the time and yours can as well. We’ll provide an example of how a company can determine its safety stock based on the aforementioned criteria
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I amagreeing with my colleague’s answer Mr. tarig
Yes. Customer demand fluctuation impacts inventory level and to ensure minimum inventory level and to increase cash flow, it is very much imperative to revisit not only the safety stock calculation, even the order quantity and batch quantity needs to be looked into since you are following periodic order system.
You can setup the revision based on the past 2 years demand. Analyse how demand varies across entire year, why the demand variation, what is the ordering cost, what is carrying cost, current demand prediction etc., needs to be counted before setting the frequency for revision.
I apologize for the answer, I leave the answer to experts specialists in this field that's not my specialty field
