In any industry, one of the goals of the business should be to carry as little stock as possible while not compromising the businesses ability to deliver to customers on time. In a perfect world a business would receive the inventory it needed just in time to on–sell it or to consume in the manufacture of other goods. Yet in reality operating in a just in time fashion can be vary dangerous as one little delay in receiving goods from a vendor can halt production at a factory or limit what you can offer your customers. For example you can imagine how embarrassing it would be for a computer store to run out of computers because a boat or truck was delayed!

While a business should be reluctant to run with zero safety stock they also do not want to carry to much stock. The advantages of carrying fewer inventories include; less money tied up in stock, lower chance of stock becoming obsolete and less space required to store the stock. As you can see it becomes a real balancing act trying to have enough stock that you will never run out while also having little enough that you are not wasting your money on storage, obsolescence and financing costs associated with money tied up in inventory.

Example

• Sales per day: 10
• Lead time: 7 working days
• Minimum order quantity: 60
• Day one stock on hand: 90

In the above example we have enough stock to last us 9 days (90 on hand and sales of 10 per day). On day two we would place an order for a minimum of 60 units, which would arrive on day 9, and there would be no shortage of stock and we would have great inventory optimization. Yet if our sales go up or the supplier takes longer than 7 days then we run into problems. This is where inventory planning for safety stock is needed.

There are many different approaches and different calculations that can be used for determining the levels of safety stock that a business should carry. I have seen some businesses take a textbook formula and apply it to every item they purchase. The result being they had far too much stock. I don’t believe there is a “one size fits all” method to calculating an appropriate minimum stock holding. Factors that you need to consider when determining minimum stock holdings in your inventory system include:

• How reliable is the supplier? Do they always deliver on-time?
• Is the lead time correct or can we expedite an order if stocks are running low?
• How reliable is the forecasted consumption?
• Is there an alternative local supplier with a short lead time?
• How critical is on time delivery to the business?

As you can see there are many factors that smart people should take into consideration when determining what a sufficient level of safety stock is. Typically, it is most critical to evaluate your safety stocks on items with a high value and items with a high stock turnover. Apply a simple perato (80/20) rule to this and you will cover the important items.

My advice is to take the top items by value and by turnover and then apply some logic based on what I have talked about above to come up with a realistic quantity to hold as safety stock. Depending on how big your business is you need to get the right people to agree on the levels you are setting. Usually the two people with the most interest in safety stock are the accountants who don’t want any money tied up in surplus inventory and the purchasing people who never want to run short of any item.

By applying the above logic you should be able to run minimum stocks whilst maintaining a constant supply to your customers