Safety stock.pptx Material management notes
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Safety stock is the extra inventory kept to prevent stockouts due to demand fluctuations or supply chain delays. It acts as a buffer to ensure smooth operations and avoid disruptions in production or sales.
Safety stock.pptx Material management notes
- 1. Safety stock Sandhya Singh Assistant Professor ORCID-0000-0001-7337-5557 Sandy.raj03@gmail.com Rajiv Academy for Technology & management Mathura
- 2. Safety stock Safety stock, also known as buffer stock, is a term used in inventory management to describe the extra stock held by a company to mitigate the risk of stockouts due to uncertainties in demand or supply lead times. It acts as a cushion to absorb variations in demand or unexpected delays in the supply chain.
- 3. Here are some key points about safety stock: 1. Demand Variability: Safety stock is primarily used to address fluctuations or uncertainties in demand. Demand for a product may vary due to factors such as seasonality, promotions, market trends, or unforeseen events. 2. Supply Variability: Safety stock also helps in managing uncertainties in the supply chain, such as delays in deliveries from suppliers, production disruptions, or transportation issues. 3. Service Level: The level of safety stock maintained by a company is often tied to its desired service level. Service level represents the probability of not having a stockout during a specific time period. A higher service level generally requires higher levels of safety stock. 4. Inventory Costs: While safety stock helps ensure customer satisfaction by preventing stockouts, it also incurs additional inventory costs. These costs include holding costs, such as storage, insurance, and obsolescence, as well as opportunity costs, as the capital invested in safety stock could be used elsewhere. 5. Calculation: There are various methods for calculating safety stock levels, including statistical models, such as the normal distribution, and more advanced techniques like simulation or optimization. These methods take into account factors such as lead time variability, demand variability, and desired service level. 6. Continuous Review vs. Periodic Review Systems: Safety stock can be managed in different inventory systems, such as continuous review (e.g., the reorder point system) or periodic review systems (e.g., fixed order quantity system). The choice of system depends on factors such as the nature of the product, demand patterns, and supply chain characteristics. Overall, safety stock plays a crucial role in balancing the trade-off between customer service and inventory costs in material management. It helps companies maintain adequate stock levels to meet customer demand while also managing supply chain uncertainties.
- 4. Safety Stock Calculation Safety stock calculation involves estimating the extra inventory needed to buffer against demand variability and supply chain uncertainties. There are several methods for calculating safety stock, but one common approach is to use statistical methods based on demand and lead time variability. Here's a simplified explanation of how safety stock can be calculated:
- 5. 1. Determine Lead Time: Identify the lead time for replenishing inventory, which is the time it takes from placing an order with the supplier to receiving the goods. 2. Estimate Demand Variability: Analyze historical demand data to determine the variability or uncertainty in demand over the lead time. This could involve calculating metrics such as standard deviation or coefficient of variation. 3. Consider Service Level: Determine the desired service level, which represents the probability of not experiencing a stockout during the lead time. Common service levels include 95%, 97.5%, or 99%.
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- 7. Safety Stock other methods 1. Statistical Methods: 1. Normal Distribution Approach: This method assumes that demand follows a normal distribution. It uses statistical parameters such as mean and standard deviation to calculate safety stock based on desired service level and lead time. 2. Service Level Approach: Instead of relying on the normal distribution, this method directly calculates safety stock based on the desired service level. It typically involves multiplying a service factor by the standard deviation of demand. 2. Historical Data Analysis: 1. Historical Variability: Analyzing historical demand and lead time data to estimate variability. This method may involve calculating metrics such as standard deviation, coefficient of variation, or range of variation. 2. Worst-Case Scenario: Identifying the maximum observed demand or lead time in the past and using it as a basis for safety stock calculation. This approach is conservative but may overestimate safety stock levels. 3. Simulation: 1. Monte Carlo Simulation: Using simulation techniques to model various demand and lead time scenarios and estimate safety stock requirements. This method accounts for the stochastic nature of demand and lead time variability. 4. ABC Analysis: 1. ABC Classification: Prioritizing inventory items based on their importance and value to the business. High-value items may receive more attention and potentially higher safety stock levels to ensure availability.
- 8. 1. Service Level Agreements (SLAs): 1. Customer Service Agreements: Establishing agreements with customers regarding service levels and order fulfillment requirements. Safety stock levels may be adjusted to meet contractual obligations. 2. Advanced Forecasting Techniques: 1. Demand Forecasting: Using advanced forecasting models to predict future demand more accurately. These forecasts can inform safety stock calculations by providing better estimates of demand variability. 3. Supply Chain Collaboration: 1. Collaborative Planning, Forecasting, and Replenishment (CPFR): Collaborating with suppliers and other partners in the supply chain to share demand and inventory data. This collaboration can help reduce uncertainties and improve safety stock planning.