Myth #1: Setting Safety Stock to Zero Will Reduce Inventory
Sometimes, safety stock is good. It protects against variability in both demand and lead times. At a time like now, when supply variability is at an all-time high, you need some safety stock.
At the same time, someone from a corner office is ordering you to reduce inventory as part of a higher-level initiative to free up cash.
Supply chain leaders often reduce safety stock to zero in an effort to achieve this. Their inventory levels do, in fact, go down, but so do their service levels. Customers who can’t get what they ordered when they want it might be unsatisfied and choose to go with your competition. Losing customers and seeing extensive delays will likely cost you more than the expense of maintaining safety stock.
Getting a solid understanding of the relationship between safety stock and service level will go a lot further to reduce inventory than zeroing out safety stock. A supply chain planning solution can effectively illustrate the safety-stock-to-service-level relationship and quickly deliver the data you need to cut inventory 10% to 20% without reducing the service level.
Myth #2: A “Textbook” Safety Stock Formula Will Do
Textbook models will help you achieve a target service level only if both the lead time and demand are normally distributed. This does not take into account the reorder period, upstream failure rate, or order quantity requirements that are part of cycle stock.
Using only a textbook model alone is a bad idea if the reorder period, upstream failure rate, or order quantity requirements significantly impact your supply chain. Which they usually are, even without the curve balls of a pandemic thrown in. You need a safety stock formula designed for your unique needs to ensure you cover every detail.
Myth #3: Safety Stock Declines as Average Supplier Lead Time Declines
It’s common to think that safety stock automatically decreases your average supplier lead time, but this is a misconception. In reality, safety stock is influenced by variability in your supply and demand.
Changes in your mean lead time and demand affect cycle stock but not your safety stock. Cycle stock is the regular amount you keep between orders, while safety stock is extra inventory that protects you from unexpected changes. When your supplier’s lead time varies a lot, there’s more risk of running out of stock, so you need more safety stock. Cycle stock is usually consistent since you have a set replenishment schedule.
So, really, it’s about variability. By reducing the variability, you reduce your safety stock. Here’s an example:
Supplier A has an average lead time of 15 days but a lot of variability — sometimes, they take much longer. Supplier B has a longer average lead time of 24 days but little variability. Even though supplier B takes longer on average, their deliveries are more consistent. This consistency means you need less safety stock to cover unexpected delays.
Meanwhile, supplier A’s variability means keeping more safety stock on hand in case they take longer than expected. It’s the consistency in timing, not the average lead time, that really affects how much safety stock you need.
So, the variability of your lead time increases your safety stock. The same principle also works with demand — demand variability drives up safety stock.
The bottom line is that you don’t need safety stock when there is no variability.
Myth 4: Safety Stock Eliminates Stockouts
Safety stock is designed to prevent the majority of the stockouts, not all of them. There will always be stockouts.
That’s because you have zero control over supplier lead times and very little control over demand. Although, there are ways to use pricing tools to strategically deplete low-demand inventory or increase margins on high-demand inventory).
What you can do is play around with the safety stock equation, looking and customer service levels as a trade-off. Using a cost-of-service analysis tool, you can find the most profitable balance of safety stock between stockouts and overstocks. You can continually refine the forecast to decrease variability and maintain practical service levels that work for you and your customers.
Re-Examining Inventory Management
When it comes to supply chain efficiency, inventory management is everything. It directly influences your ability to meet demand and reduce costs. Traditionally, companies have tried to optimize inventory by balancing holding costs and stockout risks. However, an unpredictable market makes re-evaluating your current strategy essential, especially when talking about safety stocks.
Safety stock helps protect your company during uncertain times. As demand fluctuates or supply chain demands continue, safety stocks can shore up your inventory. Rethinking how safety stock is managed and integrated lets supply planners respond to market changes more quickly. A well-managed safety stock gives you these benefits:
- Maintain high service levels: Proper safety stock calculations improve your service quality. Having enough on hand to meet customer demand keeps consumers happy. They’ll be more satisfied with your service, even during shortages.
- Prevent overstocking: Well-managed safety stock also helps with overstocking. Overstocking can cause high holding costs and wasted resources. Holding what you need where you need it keeps your costs down.
- Faster response times: Poor safety stocking means slower response times. When you have the right reserves, your company can respond to supply interruptions and demand surges faster.
- Reducing stockouts: Having safety stock helps prevent stockouts. Avoiding frequent stockouts lets businesses maintain production flows, reducing downtime.
