Safety Stock Management

Introduction

Safety stock is surplus inventory held by an organization to help reduce the risk of running out of stock or going “line down” during manufacturing.

Safety stock management is a proactive approach to inventory management that attempts to establish a minimum amount of inventory to keep on hand as a buffer against demand (sales) surges or supply shortages. This is in contrast to reactive approaches that trigger procurement activities only when material demand is imminent. In most cases, the two approaches are used together depending on a number of factors. For example, safety stock may be maintained only for items that are low cost or take a long time to acquire.

Managing safety stock properly is just as much about keeping enough material on hand to satisfy demand as it is about reducing the amount of safety stock to avoid excessive idle inventory. Proper use of available tools and establishing reliable workflows and inventory policies can help your organization run lean and efficiently.

Pain Points

There are a lot of levers and dials available in the realm of safety stock. Managing this machine efficiently will help you reduce idle inventory, smooth lead times, and reduce or eliminate line-down situations. Below are a few things to consider.

Out of Stock or Line Down

The primary goal of maintaining safety stock is to reduce the risk of running out of inventory and being unable to satisfy customer demand. This is the only revenue-focused goal of safety stock management. All other goals are cost-centric.

The risk of running out of stock is determined by accurate forecasting of customer demand which may not always be possible. If demand is generally predictable, it’s relatively easy to estimate how much on-hand inventory you need to maintain between replenishment cycles (builds).

If demand is more sporadic, safety stock management becomes more of a challenge. If holding costs (see below) are high, it may be preferred to put customer orders in queue and ship orders with a lead time. If holding costs are more reasonable, a larger buffer may be preferred to making customers wait.

A compromise may also be acceptable. For example, keeping a small amount of inventory for small off-the-shelf orders while subjecting larger orders to lead times. Since larger orders are often placed by more sophisticated buyers with their own safety stock policies, this approach can reduce the pain for most customers and still keep holding costs low.

Holding Cost

Idle inventory has an associated cost known as the holding cost. In most cases, idle inventory is not appreciating, so the money invested in materials on the shelf is not operating profitably. Therefore, there is a benefit to keeping safety stock as low as possible without doing harm in some other way. Item cost should be a major factor when setting target inventory quantities.

Lead Time

Lead time is the period from the point in time when an order is placed with a vendor and the point in time when the material arrives. Some items have consistently longer lead times than others. Some items have a lot of variability in lead time. If lead times are consistent and your material demand is predictable, you may be able to reduce target inventory quantity. If there is a lot of variability in lead time, it may not be possible to plan ahead accurately. In this case, more safety stock buys a little extra margin to account for the lead time variation.

Supply Chain Simplification

Many commodity items such as electronic resistors are available from multiple sources. This can afford some flexibility in sourcing but at the expense of communicating the temporary deviations to manufacturing. Trying to buy from a single source can simplify your supply chain management, create a more consistent product, a more consistent receiving process, and reduce inventory bins. For inexpensive parts, it might make sense to increase safety stock levels to help simplify purchasing and production.

Production Costs of Intermediary Products

If production comprises multiple stages of intermediary subassemblies, each one likely has different economics involved. Some stages may have relatively stable costs regardless of the production volume while others might require significant setup costs, driving up the price of low-volume production. If this is the case, setting higher target minimums or broader target ranges will allow you to run larger volumes to reduce setup costs.
As an example, consider a locally-sourced gear made with additive manufacturing (3D printing) compared to an injection-molded plastic widget. The production cost of the gear is likely to be relatively consistent from low to high volume. At low volume, however, the injection-molded widget will be dominated by the setup cost. Running large lot sizes of the widget and allowing a broader target range may be appropriate.

Effective Management

We recommend a few simple guidelines to effectively manage your safety stock levels with Aligni.

Set Minimum and Maximum Targets

When only a minimum is established, it can be unclear what quantity of an item to purchase when it needs to be replenished. With an established maximum target, buyers can more efficiently aim for the target range. Efficient safety stock ranges strike a balance between order size, order frequency, and the corresponding holding costs.

Review Targets Periodically

Product sales and demand change over time. Item lead times can change as well. It is important to revisit item safety stock targets regularly to avoid mismatches between target ranges and demand requirements.

Aligni’s safety stock history can help during this review process. You can see how often an item enters and exits the replenishment list. This can help determine if a particular item is being cycled more often than you’d like.

Use the Snooze

Sometimes an item’s target range is adjusted just right when you encounter a temporary lull in demand. The snooze button can hide the item from view for a little while without an unnecessary change in the target range.

Apply Priorities

The nature of safety stock is that there is not always an immediate need for some items. Use Aligni’s priorities and status indicators to help guide your efforts and organize replenishment activities.