Question #5: How can I best determine how much safety stock to have on hand at any given time?
As with most everything in demand planning, there is no simple answer to this one. There are just too many variables at play. And optimal safety stock levels differ widely from industry to industry, company to company, and product to product. Even so, there are a few universal things that demand planners should keep in mind when determining what is best for their company.
First, take into account how long it will take, on average, to replenish your stock from a vendor. Then figure out your average daily demand. As a general rule, you’ll want to keep enough safety stock on hand to cover this period of time.
Yet also keep in mind that averages only prepare you for business as usual. Consider, too, what your maximum demand level could be and what level of service you’d like to maintain regardless of external hiccups. Then repeat this exercise with your anticipated minimum demand level and consider what would happen if inventory turnover was slower than forecast.
It’s all about balance. Keeping safety stock comes with additional holding costs. While you want to avoid stock-outs, you also want to avoid storing a ton of excess inventory. So carefully weigh — and continue monitoring — the costs and benefits of maintaining a certain level of stock.
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