Safety Stock is: understanding, benefit, and how to calculate it
A trading company needs a supply chain management system to support its operational activities. Well, Safety Stock is one of the management who can help the Supply Chain to continue to operate, so it can minimize the delay in the delivery of an item.
So, what exactly is the sense of Safety Stock? What are the benefits that the company can get when applying a Safety Stock? How do you do the calculation?
Find the answer to reading the article about the Safety Stock to finish.
The definition of safe stock is
Asagi explained that the safety stock or safety stock is a supply prepared by the company to prevent a lack of inventory when the condition of the market demand is uncertain. Factors that have a big impact on this inventory require a certain period before the items arrived.
While Chase, Jacobs, and Aquilano argued that Safety Stock was many product inventories summed up with the initial request at the estimated total demand for goods in the future.
So based on the explanation of the experts above, we can conclude that Safety Stock is a method for minimizing the fraud of the inventory of a trading product.
In a trading company accounting system, this Safety Stock system is utilized to calculate the quantity of a product or goods. For this reason, special calculations are needed so that product inventories can meet customer demand.
Important Safety Stock Role
Safety Stock or Stock Safety has a very important role in supply chain management. This system is made to maximize profits, anticipate fluctuations in market demand and make it easier for goods production schedules.
As we know that inventory law and also demand is always influenced by market conditions, if market conditions always move dynamically, the company must apply safety stock to anticipate changes in demand and can take more advantage.
Safety Stock is also needed to determine the appropriate level of inventory. If the inventory is too much, the rotation of money will stop in the company’s trade capital. Conversely, if there is too little inventory, the company will experience a stock out.
Some factors that make the company experience stock out are demand fluctuations, the application of inaccurate forecasts, and a very diverse lead time. For that Safety Stock can be used to press Stock Out by comparison of the number of service levels that are directly proportional to the stock out.
Simply put an example, the ABC company provides an appreciation of service levels as much as 98%, which means a 2% Purchase Order from Stock Out is only 98% capable of being processed. This figure can be obtained from the calculation of the Safety Stock formula.
Problems that arise due to the calculation of unsafety stocks that are not right
Often the company’s inventory system experiences major problems in the number of items needed, whether raw material or finished goods. Often companies also experience some lack of inventory, while in others there is too much inventory.
This problem will certainly have a big impact on the smooth process of the production process, such as a long waiting time that can increase the lead time, so the production process will experience deviations from the schedule previously planned.
How to calculate it
In calculating service level, you can use the SS formula that can be seen based on the actual demand data. Furthermore, the standard deviation calculation is calculated then multiplied by the safety factor. The following is the full formula.
Safety Stock = Safety Factor × Standard Deviation or, Safety Stock = Z × √ ((PC / t) × σD)
Based on the formula above, it is known that the Z is a safety factor, the PC is a Cycle Performance, σD is a standard deviation and t is the demand period cycle
Safety Stock = (maximum sales daily × maximum waiting time) – (daily average sales × average waiting time)
The calculation of this formula is appointed by using Reorder Point, and only used when a paste change occurs for a long period or more than 2 years. This Reorder Point calculation can still be repaired along with the preparation of income statements every 3 months.
There is a distribution warehouse that does the marketing plastic roll to be used as meatpacking in the food industry. The average need for a week is 50 rolls, std deviation of 10 roll weekly needs
STD Deviation Lead Time is 0. While the stable lead time production process is 7 days and the lead time shipping from the factory to the warehouse is 1 day, so the total is 8 full days. The deviation is calculated every 1 week.
In this case, we can use the Safety Stock formula = Z x √ (PC / T) x σd
If a service level you want is as much as 95%, where the management expects 100 orders received, and only allowed Stock Out occurs 5 times, then a table service level can be obtained with a safety factor of 1.65 for 95% service level.
Then from the data above, it is known to bring the PC to be 8 days, with 7 days manufacturing lead time and 1 day lead time delivery from the factory to the warehouse.
T = 7 days when the demand cycle per week, so that when applied to the formula will be a safety stock = 1.65 x √ (8/7) x 10 roll = 18 roll
That is the number of safety stocks that must be stored in the warehouse, to anticipate demand and also the deviation of 10 rolls per week with a total lead time of 8 days. Then what if the lead time varies, for example, 1 day Deviation of Lead Time or = 0.14 weeks
In this case, you can use the following formula:
Safety Stock = Safety Factor X √ [(PC / T x ΣD ^ 2) + (ΣLTLT X D Average) ^ 2]
= 1.65 x √ [(8/7 x 10 ^ 2) + (0.14 x 50) ^ 2] = 1.65 x √ [114.3 + 49] = 21 roll
If it turns out that this lead has a 1 day or 0.14 week deviation, then the safety stock will increase to 21 roll.
These results prove that demand variations are a very dominant factor in determining a safe stock. This influence is arguably almost 10 times the variation that occurs in the lead time.
There are two ways to reduce safety stock, namely by reducing demand deviations and taking into account the value of service level. Of course, this is done if the customer does not require a high-level service, the service level will be reduced.
If this Safety Stock has been successfully established, then monitoring regularly related to how the use of the Safety Stock. When used is only half, it is recommended to re-evaluate the value of the service level.
Based on the explanation above, we can conclude that the Safety Stock is a method for minimizing the lack of inventory of a trading product.
There are several things that you should do, manufacturing business people in carrying out inventory management.
First, the manufacturing company should use a plan and also more measurable calculations before purchasing goods, so there is no variety of unwanted things, such as delays in shipping product goods, etc.
Secondly, manufacturing companies must also be able to apply safety stock to overcome the request of goods that cannot be ascertained and in time that tends to be short or impromptu.
Third, manufacturing companies must also always strive to minimize the various costs incurred related to inventory management, so that the funds issued will be able to be used for investment in other forms.
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