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Beware of Safety Stock Formulas
Beware of Safety Stock Formulas
Beware of Safety Stock Formulas
that
to
by
like
Michel Baudin
Fascinated with the art of making
things, Michel is on a mission to
improve it. Trained in engineering and
applied math, he got his feet wet in
production in the early 1980s, and
later apprenticed under master
Japanese consultant Kei Abe for eight
years, starting his own group in 1996.
He has been consulting since 1987,
teaching courses and writing
technical books. He intends to keep
working with like-minded partners in
the Takt Times Group and
contributing improvements in the
management and technology of
manufacturing as a consultant,
trainer, and writer.
What about replenishment lead times? If in-plant transportation is by forklifts dispatched like taxis,
replenishment lead times cannot be consistent. On the other hand, if it takes the form of periodic milk
runs, then replenishment lead times are fixed at the milk run period or small multiples of it. With external
suppliers, the replenishment lead times are much longer, and cannot be controlled as tightly as within the
plant, and a safety stock is usually needed.
Let us assume that all the conditions shown in Figure 1 are met. Then there is a formula for calculating
safety stock that you can find on Wikipedia or in David Simchi-Levy's Designing and Managing the Supply
Chain (pp. 53-54). Remember that it is only valid for the Reorder Point method and that it is based on
standard deviations of demand and lead time that are not accessible for future operations and rarely easy
to estimate on past operations. The formula is as follows:
Where:
S is the safety stock you need.
C is a coefficient set to guarantee that the probability of a stockout is small enough. You can think
of it a number of standard deviations above the mean item demand needed to protect you against
shortages. In terms of Excel built-in functions, C is given by:
C = NORMSINV(Service level)
Service level
C
90.0%
1.28
95.0%
1.64
99.0%
2.33
99.9%
3.09
The other factor, under the radical sign, is the corresponding standard deviation.
L and L are the mean and standard deviations of the lead time.
D and D are the mean and standard deviation of the demand per unit time, so that the demand for
a period of length T has a mean of D xT and a standard deviation of Dx T
C*SQRT((AJ4*AL4^2)+(AI4^2*AM4^2))
then, looking at the spreadsheet columns, you found that they were used as follows:
And therefore the first term under the square root sign was DxL2 instead of LxD2.
The third problem was that the formula requires estimates of standard deviations for both consumption
and replenishment lead times, but no data was available on the latter. To make the formula produce
numbers, the standard deviations of replenishment lead times was arbitrarily assumed to be 20% of the
average.
For all of these reasons, the calculated safety stock values made no sense, but nobody noticed. They
caused no shortage, and the "scientific" formula proved that they were the minimum prudent level to
maintain.