Managing Demand Variations With Safety Stock

MANAGING DEMAND VARIATIONS WITH SAFETY STOCK By James A.G. Krupp Shows statistically how to define safety stock ... uses three cases to illustrate the mechanism...describes how to balance the cost of holding inventory and profit foregone as a result of outages. Variations between actual demand and forecast are inevitable. A fundamental premise of forecasting is that a forecast will be wrong, though we are not sure by how much and when. Safety stock is a necessary strategic weapon of the business to enhance and maintain customer satisfaction and loyalty. At the same time, any investment beyond that which is absolutely required must be viewed as wasteful. This article proposes approaches which can provide some degree of protection against inventory imbalances. It also demonstrates that properly analyzed safety stock can be a valuable tool in enhancing the bottom-line profitability of the company. In many companies, the assignment of safety stock is driven by heuristic rules, often differentiated based on ABC codes. But these rules have no foundation in the variability of demand at the individual SKU level against which we seek to protect the customer. Development of safety stock ...