Safety stock optimisation can help ensure you meet demand thus helping to boost profits. However, holding excessive amounts of buffer stock can be a huge drain on resources. Yet, something unexpected could always happen and customers never buy exactly what we expect. For instance, some customers buy more stock, some customers buy less, some switch to other products while other customers completely new to us. As a result, when forecasting demand, there is always a degree of uncertainty. To manage this ambiguity, you have to hold some form of safety stocks. If you could be a 100% sure that your forecasts were accurate, safety stocks would be a waste. However, given the various influences on demand patterns, deciding how much buffer stock to hold is an important decision.
In order to calculate appropriate safety stock levels, a target service level based on the extent to which you want to cover the uncertainty in demand is required. While you may hope to achieve service levels of 96% or even 98%, such targets can result in high levels of buffer stock. From a sales perspective, attaining a service level of 99.9% would seem to be a very realistic target. Few businesses have enough money to invest in safety stock optimisation for every item across a whole product assortment.
The solution here is to choose wisely and categorise products. For example, whereas for some products, holding high levels of buffer stock is exactly what the business requires. For others, holding very low safety stock or even none at all is the right decision.
When looking at which products require high safety stocks, a range of variables must be taken into consideration. For instance, there is the level of uncertainty which can be measured as the deviation from historical demand. The associated inventory costs must also be considered; whereas safety stock optimisation for expensive items naturally have a higher value. Lower-priced products can be held for a relatively lower cost. Finally, lead times can have an impact as longer lead times increase the requirement.