Inventory Fitness: FAQ – Question 3 of 14

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!

Question 3 of 14

Question:
What should be the basis of setting safety stock targets in the inventory policy, whether it is service level or should it be based on past sales?

Answer:
Well, I’m not sure that thinking about it from a past sales or from an inventory perspective is the right place to start.

In general, we would recommend starting with, “What does your commercial organization need to be competitive in the market?”

For example, in some industries, having ninety percent customer service is extremely competitive. In others, it doesn’t even get you into the game. The key is that you align the service levels with the needs of the business, and then you decide on what variability element you want to use to actually drive the love.

Yeah. And really, one of the other important things here is to remember that service level has two components. It’s the service level the customer receives that the customer sees. And that’s the service level Kai is talking about is, “What service level does that customer see?” Some customers, especially in medical devices and pharmaceuticals, need to see very, very remarkably high service levels.

The service level you use to calculate something like safety stock is different because there, you’re deciding how you are supplying that service level. For example, if you say I’m going to have a ninety-five percent service level from safety stock, what you’re saying is it’s okay, one order in twenty or five percent of the time, to do something with that order; expedite, produce in advance, or even to make the customer wait. That’s how you supply the service level. So, remember, there are two sides to that. Let’s, from the marketing perspective, understand the customer’s perspective and then make the active decision internally.

Am I set up to do a lot of expedites? Do I have really flexible production? In which case, great. You don’t need a lot of safety stock because you can flex. Or, if you don’t have really flexible production, look at what the service level is you need to supply from stock.

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.

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