Question

What are parameters used to calculate safety stock?

Answer 1

Optimizing Safety Stock levels by calculating the magical balance of minimal inventory while meeting variable customer demand is sometimes described as the Holy Grail of inventory management (ok, forecasting is probably the true holy grail but I thought this sounded good). Many companies look at their own demand fluctuations and assume that there is not enough consistency to predict future variability. They then fall back on the trial and error best guess weeks supply method or the over simplified 1/2 lead time usage method to manage their safety stock. Unfortunately, these methods prove to be less than effective in determining optimal inventory levels for many operations. If your goal is to reduce inventory levels while maintaining or increasing service levels you will need to investigate more complex calculations.

One of the most widely accepted methods of calculating safety stock uses the statistical model of Standard Deviations of a Normal Distribution of numbers to determine probability. This statistical tool has proven to be very effective in determining optimal safety stock levels in a variety of environments. The basis for this calculation is standardized, however, its successful implementation generally requires customization of the formula and inputs to meet the specific characteristics of your operation. Understanding the statistical theory behind the formula is necessary in correctly adapting it to meet your needs. Errors in implementation are usually the result of not factoring in variables which are not part of original statistical model...