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White Papers

A. Overview

1. Simple Safety-Stock Calculation Comparison — Which One is Optimal?

Abstract: Examples and charts comparing and contrasting LS3 safety-stock levels to a common safety-stock calculation and an ABC-stratification, for a variety of typical demand patterns.

B. LS3 Safety Stock Discussions

2. Common Safety Stock Calculations — Inadequate, Incorrect, Dangerous

Abstract: Businesses are dissatisfied with the financial and customer-service-level performance of their current safety-stock calculations or techniques. As evidence of this, one major Internet search engine records about 20,000 searches per month involving "safety stock." Why?

Safety stock has a profound effect — beneficial when it's right, but detrimental when it's not — on a company's current and future financial performance, customer-service levels and obsolescence exposure.

Many safety-stock calculations are readily available, whether on the Internet or other media. This discussion will establish that these common, popular safety-stock calculations provide inadequate, incorrect and financially dangerous results for the real world of business — and why. We will then propose a correct, comprehensive, reliable safety-stock model.

Common, popular safety-stock calculations are based on unrealistic fundamental theoretical assumptions that simply do not reflect business realities. They have a number of failings.

3. Safety Stock Analysis for Critical Business Decisions — Optimal Service Levels, MOQs, EOQs, Safety Stock and Maximized Inventory-Management Profitability

Abstract: This discussion considers how TopDown Lean Systems' Lean Safety Stock Solution, or LS3, enables you correctly to quantify safety stock, expediting, and their associated costs. Then, using these quantified results, we will demonstrate how LS3 optimizes your strategic service-level targets and economic order quantities.

As we do so, we will address these topics including expediting as a dimension of service level and as a business strategy, statistical confidence in safety-stock levels, incremental margin and optimal fill rate, and the factors that affect safety stock.

4. Service Level and Inventory Optimization — Correctly Addressing All Factors

Abstract: Answer these three probing questions:
  1. Does your technique for establishing safety-stock levels address all of the relevant factors?
  2. If so, does it do so objectively?
  3. And if still so, does it do all of this correctly?
In this white paper, we will:
  • Highlight the critical links that connect safety-stock levels to reliable service-level attainment, optimal inventory performance and maximized financial results.
  • Underscore the need that inventory-carrying businesses, along with supply-chain consulting services, have for a safety-stock-level technique that correctly addresses all of the factors discussed below.
  • Enable you to answer the three probing questions for your service-level and inventory-optimization circumstances.
  • Offer a solution that consistently achieves your service-level targets with minimal expediting, while optimizing your inventory velocity and financial performance.

C. Derivations of Common (Suboptimal) Safety Stock Formulas

5. SAP Safety Stock Formulas Derivation

Abstract: We are often asked the question of how the SAP safety-stock formulas are derived. This paper reverse-engineers the formulas, in order to document their derivation based on statistical theory. This derivation clarifies the significant fact that the computed safety-stock values are derived to satisfy an event-based service-level criterion; namely, that the specified service level represents the probability of no stockouts over a period of time equal to the lead time.

This paper's conclusion discusses limitations of using the SAP safety-stock formulas to optimize safety-stock levels and fill-rate-based service-level performance.

6. Safety Stock Formula Involving Lead Time Variation — Derivation and Performance

Abstract: One can find various safety-stock formulas that integrate lead-time variation. This short paper explains how one of these formulas is derived. This formula is in fairly common use; for instance, it can be found at the Inventory Management Review website. To be able to refer to this formula easily throughout the paper, we will call it Formula LT (where "LT" refers to "lead time").

In words, Formula LT reads:

Safety Stock = Z*SQRT(Avg. Lead Time*Standard Deviation of Demand^2 + Avg.
Demand^2*Standard Deviation of Lead Time^2)

We will first show how this formula is derived and then explore its performance and limitations using examples built around simulated data.

If you would like to read one or more of these white papers, please contact us.

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