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Articles in This Series
Lessons & Stories
How Replenishment Squeeze Plays Happen, and the Defense Against Them
Not all inventory is the same. There are fast movers, slow movers, and dogs. When open to buy is tight inventory managers face challenges to stay in stock. A high overall volume that allows you to always meet order minimum helps. But if your order volume across a vendor’s product line is thin but for a few high movers—and worse, companions to high movers—you have a problem making order minimum.
Multi-Variable Mayhem
The trouble with managing inventory is the many variables that affect stock levels. This balancing act is hard to do because there are so many different variables that influence decisions:
- Demand Fluctuations
- Supply Fluctuations
- Inventory Policy
- Working Capital
- Manager’s Intelligence
- Monitoring & Management Systems
Deconstructing Safety Stock
The first confusion about safety stock is which method or formula to use.
Which formula? Are you confused? Many are. There are heuristic methods, brute-force methods, and four statistical methods.
Which is the way to go? The answer is “It depends.” Faster replenishment and short lead times often eliminate the need for safety stock. The inventory philosophy also guides the decision.
Do you need safety stock?
Substitution comes into play in determining safety stock. If your store offers the customer more than one option, and the cost of going elsewhere is higher than the cost of the substitution, the customer is likely to buy the substitution, and you still generate income. Here is an example of substitution that eliminates the need for safety stock at retail.
Sadistically Statistical Safety Stock
In the previous article we examined the simple forms of Safety Stock calculations. For many small shops these work. If the operation does not track demand (sales) and other factors, like the actual lead time in a disciplined periodic schedule (daily or hourly), then the methods we covered last Tuesday will work most of the time.
Why do I say most of the time? Well, that is because of the real purpose of Safety Stock. Safety Stock is not meant to eliminate stock outs, only to reduce the likelihood of them happening. Think of Safety Stock as insurance — it does not prevent the accident; it only provides some recovery protection. Even with safety stock, things can happen that spike demand or drop supply until there is not enough inventory on hand to fulfill the demand.
Let’s repeat: Even with Safety Stock there will be times where there is not enough inventory on hand to fulfill the demand.
Multiple Statistical Safety Stock Methods
There are four statistical methods for calculating safety stock. Each fits a specific application niche, depending on the conditions of the inventory in question.
- Lead time never changes and demand changes.
- Demand never changes and the lead time changes.
- Lead time and the demand changes, and are independent.
- Demand changes depend on lead time changes.
Confused? Some folks are. In preparation for this series, I researched a plethora of articles about calculations, in order to see what people are using. Back in the Dark Ages, before programmable calculators and personal computers, I learned the four different methods. Each method is for a specific application. Each method requires a different amount of work, which was not a trivial matter in the days of hand calculation. Finally, each method yields a different answer.
That last line is important: each method yields a different answer. For those readers who have been following our blog for a few years, the image above should be a familiar reminder that one size does not fit all. It recalls an old garment industry joke: You’ve heard the expression, “One Size Fits All”? The joke is that this statement is true only of the Mumu — the housedress. Yes, it fits everybody, but not quite in the same style, and not as well as other garments.
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