During the recent webinar, Inventory Fitness – Governance, Targets, and Segmentation, we took audience questions and answered them.
Here are some issues that people in industry face and are interested in finding a solution to!
Question11 of 14
Question:
What is the difference between safety and strategic inventory as safety inventory should take into account a variability that is a consequence of uncertainty?
Answer:
Oh, one of my favorite topics and one that’s not often discussed. So, let’s start off. Most ERP systems have a single place where safety stock is put in. It’s called safety stock.
It’s a single field. The number you put into that field, however, has two elements: safety stock and strategic stock. Safety stock is kept against known, typically recurring variability, like forecast error, which is forecast minus sales divided by forecast, recurrent supply timing, quantity uncertainties, natural variations in supply and demand, things we know something about. So, with safety stock, statistics tend to be valid in many cases.
Not always, but hey, we have a certain amount of variability. We want to cover the variability. That’s technically safety stock.
But there’s another component that goes into that same data field. So, it’s a component of the number separate because this is event-based stock. So, it’s going to cover variability, but it’s more event-based variability.
How do we know what we’re doing there? Well, we try and support that with assumptions. As an example, if we’re supplying an item to the Gulf Coast that is used during hurricane season, call it plywood or water, we want to know how many hurricanes are going to hit the Gulf Coast this year. We don’t know that number.
No one can know that number. You can go back and look at yearly statistics and everything else. “What matters is what are you planning on supplying?”, that’s your assumption.
, you can assume, say, three hurricanes hit the Gulf Coast, then you are able to plan your stocking and supply policies in order to cover that assumption. So, these stocks can overlap somewhat. There are probably PhD dissertations that are available to be done on that. But that’s the basics of safety against variability, and strategic against event-based, assumptions.
And I think really the key element in this is that you document the choice that you’re making.
So, if you’re setting a service level, document why you’re making that choice. If you’re feeding in, for example, demand variability and supply variability, document that choice. If you’re making a decision to pre-build or, for example, let’s say you’re taking a bet on how many snowstorms there will be or how many hurricanes there will be.
These are the things that you need to document because that’s how you become a learning organization and improve month after month, year after year, so that you get better at making the choices and really setting the line of what piece of your business can be controlled through mathematics, what piece of your business needs to be controlled by the needs of the business, and potentially taking bets or making choices about what you will and won’t do.
Yep. And gaining consensus on that is critical so that everyone’s singing from the same hymn book. It eliminates or really minimizes finger-pointing when everyone’s able to say, hey, this is the number of snowstorms we planned on.
This is the number of hurricanes. This is the variability. It’s all set down, and we have consensus on it. We don’t necessarily all agree, but that’s the plan we’re going to use.
Remember, we’d be happy to chat with you about any of this in more detail.
And if you’re interested, check out our schedule for upcoming business process improvement courses that we offer throughout the year to help you achieve business excellence.