I’ve written at some length about the importance of safety stock in the overall health of your supply chain, how to stratify customer service levels for greater profits, and about how to approach the task of calculating your ideal safety stock levels.
There’s another important consideration involved in setting your safety stock levels, though. You have to decide whether it’s best to look at safety stock in terms of item quantity or time.
By default, most companies think of safety stock as a unit of quantity. They’ll look at their expected demand, consider the variability, and keep, say, an extra 50 smartphones on hand.
That’s a legitimate way to plan. But more advanced supply chain organizations—especially those that use modern requirements planning solutions—tend to plan for safety stock in terms of time.
Don’t Just Increase Your Lead Times
Many Demand Solutions customers have found that tracking, measuring, and managing safety stock as a unit of time makes more sense than using quantities. They often refer to their safety stock as “safety time.”
But let’s make one thing clear: the most effective way to use safety time is not simply to increase your lead time for every order, even though this was the popular way to do it in the past.
The far more accurate approach is to look forward and capture your forecasted demand for any item. This way, when you hold onto “three weeks of safety time,” you’ll be keeping on hand a targeted inventory level of three future weeks of demand.
In other words, you won’t simply figure out how many of this item you typically sell in a week and then multiply it by three—you’ll actually be holding the right amount of this item based on your forecasted demand for the upcoming three weeks.
Stay Ahead of Seasonal Changes
There are some definite benefits to using safety time instead of safety stock. For one thing, safety time anticipates changes in demand for seasonal items.
Suppose you’re selling a seasonal item such as snowblowers. You won’t need to keep many snowblowers in your warehouse in June. But as you approach winter, demand will surge, and you’ll want to increase your stock and safety stock accordingly. If you’ve set your safety time at four weeks, you can look ahead four weeks and figure out exactly what quantity you should have on hand. If you’re using the right software, your system will increase this amount automatically.
As sales ramp up, so will your stock. Similarly, as you move into spring and your demand curve trails off, the automatic rule in your system will keep looking ahead four weeks and reducing the amount of safety stock you’re holding.
What does it take to accomplish all this? You need a time-phased requirements planning system like Demand Solutions and an ability to calculate and track safety stock as a unit of time. This will give you future visibility into expected sales so that you can accurately determine what level of safety stock you’ll need to continue meeting your customer service targets—even as demand waxes and wanes throughout the year.
Bill Macdonald has a background that spans consulting, sales and operations. His career started as a consultant at Accenture and Deloitte Consulting. As Sales VP at global outsourcing provider HCL Technologies, he led North American sales for its financial services vertical. Prior to HCL, he served as EVP for global software solutions companies Atrion and ClearCross. He also spent six years at software giant SAP, where he was recognized as a Lifetime Top Performer.