Safety inventory - "safety stock" is used in most process industry firms to optimize supply chain performance in view of demand uncertainty. In the real world, what do we need to consider to estimate quantities and manage safety stock levels? At a minimum, our view is:
- Adjust inventory policies if demand is seasonal. Reorder points should be much shorter in peak season than the off season.
- Plan for the fact that demand is "lumpy." Customers tend to order in "economical quantities" so this adds significantly to the variability of demand.
- Use advanced computer simulations to model and test inventory policies. Simulations should consider seasonality and "lumpiness."
- Start the safety inventory planning process with a pilot. Rome was not built in a day - simulations cannot identify every problem and determine an accurate safety stock plan.
- Monitor service levels. An optimal inventory policy is great, but it should not detract from customer service metrics - on time delivery, percent perfect orders, first pass quality, etc.
Considering the factors listed above, and many more, the focus should remain tightly focused on reducing safety inventories. Safety inventories are typically a big percentage of the investment and value of total inventory in a supply chain.
Synchronous LLC is committed to maintaining a continuing dialogue on operational excellence and best practices for the process manufacturing industry. To pose a question, contribute a best practice, or otherwise add to the dialogue, send a note to RobBaldwin@SynchronousLLC.com . To subscribe to our weekly newsletter send your preferred email contact address to Webmaster@SynchronousLLC.com with SUBSCRIBE in the subject line.
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