Top Down Lean Systems

TAKE THE SAFETY STOCK QUIZ!

Is your safety stock correct? Your:
 • Safety-stock quantity and/or
 • Safety-stock days

Including safety stock as a part of your replenishment techniques, such as:
 • Re-order point (ROP)
 • Days of supply
 • Min-max
 • Adder to MRP gross requirements

To find out, take the TopDown Lean Systems Safety-Stock Quiz. The following 14 questions will help you determine if your safety-stock values are correct:

• Does your safety-stock calculation require replenishment interval (MOQ, EOQ, ROQ, package size, lot size, etc.), and not just lead time?
  Yes  No   Why This Is Important

• Is your safety-stock formula fill-rate-based, and not simply event-based?
  Yes  No   Why This Is Important

• Does your safety-stock calculation require your service-level business cycle time period (year, quarter, etc.), not just calculating service level during a lead-time cycle?
Yes    No   Why This Is Important

• Does your safety-stock formula require the ratio of late demand being cancelled (no past-due backlog) vs. being shipped late, not merely defaulting to 100% cancellation?
  Yes  No   Why This Is Important

• Does your safety-stock calculation determine the type of demand distribution, not simply employing normal-distribution calculations?
  Yes  No  Why This Is Important

• Does your safety-stock formula determine demand sporadicity, not just allowing sporadicity to skew its results?
  Yes  No   Why This Is Important

• Does your safety-stock calculation thoroughly pre-screen your input data, identifying issues that may skew the results?
  Yes  No   Why This Is Important

The following questions will help you determine if your safety-stock formula enables you to make the best possible business decisions:

• Does your safety-stock calculation provide the degree of confidence that the safety-stock level will achieve its service-level this year, or this quarter?
  Yes  No   Why This Is Important

• Does your safety-stock formula provide the level of expediting required to achieve your service-level targets?
  Yes  No   Why This Is Important

• Does your safety-stock calculation provide the effects of lead time, replenishment interval and confidence on expected inventory levels?
  Yes  No   Why This Is Important

• Does your safety-stock formula enable you to perform a holistic inventory-management financial analysis of expediting, reordering and inventory-carrying costs?
  Yes  No   Why This Is Important

• Does your safety-stock calculation enable you to perform an incremental-profit analysis on increased service levels?
  Yes  No   Why This Is Important

• Does your safety-stock formula provide expected actual-results ranges for fill rate, reordering, on-order and inventory velocity, so you may identify when your inventory items require safety-stock updates?
  Yes  No   Why This Is Important

• Does your safety-stock calculation recommend ROQ adjustments?
  Yes  No   Why This Is Important

TopDown Lean Systems' LS³ Lean Safety Stock Solution answers "YES" to all these questions. LS³ is a comprehensive, correct safety-stock analysis service, not an inadequate and simplistic calculation, formula, Excel file or spreadsheet.

Replenishment Interval (RI): The average elapsed time (days, weeks, etc.) from one inventory receipt to the next. RI is determined by the inventory item's reordering parameters: MOQ, ROQ, EOQ, package size, lot size, reorder-review interval, etc. RI always corresponds to reorder quantity.

As the sawtooth diagram below shows (click on image to enlarge), RI determines the width of each cycle-stock "tooth". RI's corresponding reorder quantity determines the height of each tooth. The tooth's triangular area represents an inventory item's cycle stock quantity on hand during its RI.

An inventory item's RI and lead time are rarely, and only coincidentally, the same. RI – not lead time – also determines both the frequency at which the inventory item is received and the quantity received. This point is critical, because popular safety-stock calculations require lead time, but not RI.

Popular safety-stock formulas unrealistically assume just one receipt per lead-time cycle, with that receipt occurring at the very beginning of the lead-time cycle.Go Back.

Fill Rate: A quantity-based service-level measure. Fill rate is the ratio of demand quantity fulfilled on time to total demand quantity during a business cycle (month, quarter, year, etc.).

Most businesses measure their actual service-level performance using a quantity-based fill-rate calculation. This point is critical, because many popular safety-stock calculations are event-based, not quantity-based.

Event-based safety-stock formulas determine the probability of a stock-out event during lead time, not the demand quantity unfulfilled due to stock-out. This is not how you measure your actual service-level performance.Go Back.

Business cycle: Businesses measure their actual service-level performance over a period of time. Often, businesses set their service-level targets as annual fill rates, and their key performance indicators include actual fill-rate service-level performance for a one-year business cycle. (Quarterly and monthly cycles are also common.) This point is critical, because popular safety-stock calculations require only lead time, not business cycle, as an input.

Popular safety-stock formulas determine service level during the item's lead time, not service level during a business cycle. This is not how you measure your actual service-level performance.Go Back.

Late-Demand Cancellation: For many businesses, their markets and customers - both external and internal - tolerate late demand fulfillment, and these customers do not immediately cancel this late demand. Instead of being cancelled, this demand becomes past-due, and carries over, often disrupting the fulfillment of other demand, until it is fulfilled. Businesses in this situation experience a late-demand-cancellation factor of near 0%.

Other businesses serve markets - typically, pure-commodity markets - and customers that do not tolerate late demand fulfillment. Instead, these customers cancel their demand from the original supplier and fulfill that demand from another supplier. For the original supplier, this cancelled demand does not carry over as disruptive past-due demand. Businesses in this situation commonly face a late-demand-cancellation factor of near 100%.

Popular safety-stock calculations do not require a late-demand-cancellation factor. Instead, they assume that late or unfulfilled demand is cancelled. Popular safety-stock formulas do not represent your actual market environment.Go Back.

Type of Demand Distribution: Any inventory item's demand (or usage) quantity has a lower limit. It cannot be negative; it must be zero or greater. On the other hand, demand has no such upper limit. As a result, an inventory item's demand over a period of time does not form a normal distribution. Instead, its demand is skewed, and nearly always right-skewed. This is important, because the right side of the distribution is where the higher service levels reside (see chart).

Popular safety-stock calculations assume a normal demand distribution. Popular safety-stock formulas do not represent your actual demand distribution.Go Back.

Demand Sporadicity: Some of your inventory items, both finished goods and components, experience demand (or usage) every day. Likely, however, the majority of your items do not, and a substantial number experience very sporadic demand - perhaps only a few days per month or even per year.

Sporadicity further skews an item's demand distribution (see chart). Popular safety-stock calculations assume no sporadicity. Popular safety-stock formulas do not represent your actual demand sporadicity.Go Back.

Pre-Screened Input Data: Any calculation or analysis is no more reliable than is its input data, as implied by the truism "garbage in, garbage out." Popular safety-stock calculations require standard deviation as a quantification of an inventory item's random, common-cause demand (or usage) variation, using the items time-series demand history.

An inventory item's demand history may also contain other kinds of variation: trend, seasonality, cyclic and special-cause. In practice, these non-random variations result from inventory-item introductions and phase-outs, market and economic cycles, distribution or outlet expansion or contraction, sales promotions, transactional errors, the effects of natural or man-made catastrophes and so on.

If not pre-screened, identified and properly addressed, these non-random variations distort and skew any measure of random variation. Popular safety-stock calculations provide no pre-screening of their input data.Go Back.