Navigating Safety Stock and In-Stock
Achieving an optimal in-stock or service level is a fundamental concept of inventory management regardless of the industry or supply chain we operate within. Understanding the key components that influence the balance between availability and maintaining the right inventory levels is essential to operating an efficient supply chain and business. Let's delve deeper into these elements:
1. Service Level Target: Setting a service level target is a core concept which is primarily informed by the intended customer experience. For instance, a business might aim for a very high service level to ensure exclusive products are always in stock, accepting higher inventory costs as a trade-off. On the other hand, a more value-focused department store might opt for a lower service level to reduce costs, even if it means occasional stockouts.
2. Lead-Time: The time required to replenish stock is crucial. Supply chains often source a diverse range of products from multiple domestic and international sources, making lead-time management complex. A product which takes longer to re-order, pick, process, despatch, receive at destination and process to be available for sale will generally need more safety stock than one with a more efficient supply chain assuming that demand isn’t completely predictable.
3. Demand Variability: Recognising fluctuations in demand is key as it introduces the risk of both sell-outs and excess inventory. Quantifying this variability allows a business to layer in sufficient safety stock in order to protect the products availability. Quantifying demand variability is generally easier to achieve for non-seasonal products which have less seasonal influence in the underlying shape of sales.
4. Lead-Time Variability: Consistency in lead-times is crucial for planning and plays a far greater role in the need for safety stock than many people realise. For standard DC to store leg of a supply chain, setting a slightly longer lead-time that is constantly met is a more optimal outcome than a supply chain which has tight lead-times which a regularly compromised. The former scenario allows for lower levels of safety stock as well as a more efficient replenishment operation.
In both retail stores and distribution centers, managing these variables effectively is vital for inventory optimization. To assist with this, we've developed an interactive application designed to demonstrate how these factors impact safety stock requirements.