Safety Stock - Static or Dynamic?

[Starbucks Junkie]

Guys,

I have a question.

Calculating safety stocks, what is best, a static SS reviewed and edited quarterly or a dynamic SS driven by fluctuations in demand?

Do you know any good template examples that can be loaded from the web of each variety, so I can judge which would be best for my need.

[Loggie]

Not sure where you might find templates on the web. But I guess the best approach would to a degree be based on the type of demand. Do you experience high variability in demand? If so, a more dynamic algorythm makes sense.

[Starbucks Junkie]

Loggie,

Demand is fairly variable, and company is tasked with achieving +/-30% tolerance.

At present SS settings are static, which causes in my mind high inventory due to the fact that these parameters are only reviewed quarterly.

I feel that a dyamic approach is the way to go, but I am unsure as to how to approach the development of this process, hence the request for a template from the web.

Any ideas? Or views?

[Albert]

Starbucks,

The industry partner I regularly work with asked me a similar question. My response was very long, I will try to make this short.

A dynamic safety stock highly depends on the responsiveness of the overall supply chain, and the cost of holding inventory. With enough analysis there should be a point where your ideal (percentage) level of safety stock should be calculated. In other words, this relationship should yield a model that will look something like this;

Safety stock = Demand * (percentage inventory level * Cost of holding inventory)

The percentage inventory level and cost of holding inventory should be held constant in this model. Now on the topic of responsiveness, if you have access to market data and the overall responsiveness of the supply chain to fluctuations in the market there should be a relationship which can then be integrated into the above model. In other words, a safety stock to the safety stock . A set level of inventory required to satisfy the most drastic of demand fluctuations during the time the supply chain requires to adjust to these changes.

Therefore the model would then become;

Safety stock = Demand * (percentage inventory level * Cost of holding inventory) + Safety stock of safety stock

Sorry, this seems to have become a bit longer than I first hoped. Rest assured that the industry partner in the project copped a lot more than just this from me... In reality, this relationship would probably best be calculated through simulation, but thats just my opinion.

[Neo]

1. I would classify Inventory into Normal Inventory and Safety Inventory .

2. Inventory planning be it normal or safety inventory have to be review periodically to reflect actual market movement and for inventory adjustment .

3. Inventory planning of a manufacturing company and a trading sales company
have different approached .