Safety Stock Calculations                  
 
In classic inventory management, stock holding is based in part on the economics of acquisition and in part on the need to satisfy demand over the lead time and cope
 with the uncertainty in that demand. Certain practical considerations (e.g. pack sizes , multiples etc.) are then superimposed to give practical replenishment rules.  
 
Economics of Ordering  
 
The trade off is between the cost of holding stock and the cost of placing  
and administering the order. The simplest form results in the well known  
Economic Order Quantity    
   
Cost of the Item      
Annual Demand      
Stock Holding Rate      
Order cost      
   
   
   
   
   
 
The key question in deciding whether to place an order is whether, if the order is not placed, there is sufficient  
stock on hand and on order to meet demand until the next time stock can be ordered and received.  
This is called the Forecast of Demand in the Lead Time and, as with any forecast, has an element of uncertainty  
The objective of Safety stock is to cover an agreed percentage (Service Level) of the demand over and above the forecast  
 
There are two different formulae depending on the definiton of service level used.  
1. Order Line:  95% means 95% of all order lines will be satisified on time and in full  
2. Order Quantity:  95% means 95% of all demand will be satisfied on time  
Suppose a company has 9 in stock and it takes 10 orders for 1 unit then, under both definitions, it achieves 90% service level  
But suppose it takes one order for 10, under definition 1 it achieves 0% and under definition 2 it achieves 90% service level  
 
 
Order Line Service    
Monthly Demand   units    
Weeks/month   weeks    
Forecast Error   100*SD/Fcst    
Order Interval   weeks    
Lead Time   weeks    
Service Level      
Safety Stock      
   
   
   
   
   
Order Quantity Service    
Monthly Demand   units    
Weeks/month   4 weeks    
Forecast Error   100*SD/Fcst    
Order Interval   weeks    
Lead Time   weeks    
Service Level      
Safety Stock      
     
   
Combining Batch and Safety Stock    
The interesting factor is that the Order Quantity  
 
(or interval) affects the safety stock required    
Plotting this suggests that there is a combination    
of Order Quantity and Safety Stock that will     
deliver the required service for the minimum    
investment in inventory    
In this case the optimum is when    
   
   
   
   
   
   

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