Understanding Safety Stock and Benefits and How to Calculate

rancakmedia.com – They need a supply chain management system to support their operations for a trading company. Well, understanding safety stock is one of the management that helps the supply chain function further so that delays in the delivery of an item can be minimized.

So, what exactly is meant by safety stock? How can companies benefit from adopting safety stock? How is the calculation done?

Read this safety stock article to the end and get the solution.

The definition of Safety Stock is

Assauri stated that safety inventory is inventory made by companies to avoid shortages in demand in unforeseen market conditions. Factors that have a significant effect on inventory require a certain time interval before the ordered goods arrive.

Meanwhile, Chase, Jacobs and Aquilano believe that safety stock is the amount of product inventory that is added to the initial demand to anticipate the total demand for goods in the future.

Based on the arguments of the experts mentioned above, we can conclude that safety stock is a way to reduce fraud in trade product inventory.

This safety stock system is used in the trading company accounting system to determine the amount of a product. Therefore, special calculations are needed so that product supplies can meet consumer demand.

The Important Role of Safety Stock

Safety stock or safety stock plays an important role in supply chain management. This system is intended to optimize profitability, predict changes in market demand and simplify the manufacture of goods.

As we know that the law of supply and demand is continuously affected by market conditions, companies must adopt safety stocks to anticipate changes in demand and take advantage if market conditions continue to change.

Safety stock is also required to ensure proper inventory levels. If there is too much supply, the flow of money in trading capital will stop. On the other hand, if inventory is too low, the company will run into stock.

Several factors lead to stocks including changes in demand, incorrect execution of predictions, and highly variable waiting times. This is why safety stock can be used to reduce inventory by comparing the number of service levels directly proportional to the volume of inventory.

As a basic example, ABC is offering the anticipated 98% service level, meaning only 98% of 2% orders can be handled from stock. This figure can be derived using the calculation of the safety stock formula.

Problems Arise Due to Incorrect Safety Stock Calculations

Inventory systems often present significant problems with the quantities of goods needed, both raw materials and finished goods. Often companies also experience inventory shortages while others have too much inventory.

This problem will definitely have a significant effect on smoothness manufacturing process, such as a long waiting period which can increase the lead time to experience it differently than previously scheduled.

How to Calculate

In calculating the service level, you can use the SS formula which can be seen based on actual demand data. Next, the standard deviation is calculated and then multiplied by the safety factor. Here is the complete formula.

Safety Stock = safety factor × standard deviation or, Safety Stock = Z×√((PC/T)×σD)

Information:

Based on the formula above, it is known that Z is the safety factor, PC is the performance cycle, σD is the standard deviation and T is the demand period cycle.

Safety Stock = (Daily maximum sales × Maximum lead time) – (Daily average sales × Average lead time)

Calculations in this formula are carried out using reorder points, and are only used when market changes occur over a long period of time or more than 2 years. This reorder point calculation can still be corrected together with the preparation of an income statement every 3 months.

For example

There is a distribution warehouse that does the marketing of plastic rolls for use as packing meat in a food industry. The average requirement for a week is 50 rolls, the std deviation of weekly requirements is 10 rolls

The standard deviation of the lead time is 0. While the stable lead time for the production process is 7 days and the lead time for delivery from the factory to the warehouse is 1 day, so the total is 8 full days. The required deviation is calculated once a week.

In this case, we can use the safety stock formula = Z x √ (PC/T) x σD

If the service level you want is 95%, where management expects 100 orders received, and only 5 stock outs are allowed, then the service level table can be obtained with a safety factor of 1.65 for 95% service level.

Then from the data above, it is known that the PC is 8 days, with 7 days of manufacturing lead time and 1 day of delivery lead time from the factory to the warehouse.

T = 7 days if the demand cycle is per week, so when applied to the formula it will be Safety stock = 1.65 x √ (8/7) x 10 rolls = 18 rolls

That is the amount of safety stock that must be stored in the warehouse, in order to anticipate demand and deviation of 10 rolls per week with a total lead time of 8 days. So what if the lead time varies, for example 1 day deviation of the lead time or = 0.14 weeks

In this case, you can use the following formula:

Safety stock = safety factor x √[(PC/T x σD^2 ) + ( σLTLT x D average)^2]

= 1.65 x √[(8/7 x 10^2 ) + ( 0.14 x 50)^2] = 1.65 x √[114.3 + 49] = 21 rolls

If it turns out that this lead has a deviation of 1 day or 0.14 weeks, then the safety stock will increase to 21 rolls.

These results prove that the variation in demand is a very dominant factor in determining a safety stock. This effect can be said to be almost 10 times the variation that occurs in the lead time.

There are two ways to reduce safety stock, namely by reducing the demand deviation, and by considering the value of the service level. Of course, this is done if the customer does not require a high service level, then the service level will be lowered.

If this safety stock has been successfully established, monitoring must be carried out regularly related to how the safety stock is used. If only half is used, it is advisable to re-evaluate the service level value.

Conclusion

Safety stock is a stock that is prepared by the company to prevent a shortage of inventory when market demand is uncertain. Companies must implement safety stock to anticipate changes in demand and take more profits. If there is too much supply, then the circulation of money in the company's trading capital will stop.