Service Level and Safety Stock Foresight Presentation Announcement

Executive Summary

  • My Presentation on Nov 15th, 2017
  • The Topic of the Presentation
  • The Level of Detail of the Presentation
  • How Supply and Production Planning Implementations Tend to Play Out
  • The Benefits of the Information Provided in the Presentation

Introduction

I am presenting at the November Foresight Conference. In Raleigh, NC on Wednesday, Nov 15th. The topic of my presentation will be A New Approach to Safety Stock and Service Levels.

On Service Level and Safety Stock Setting

As those that have read my supply chain articles previously, you may know that I have concluded there are far more effective ways to manage service levels and safety stock than is typically accomplished in companies. And to understand why it means getting into some background regarding how service levels and safety stock are set at companies.

If one analyzes supply and production planning systems ranging from ERP to specialized external systems (which we have as implementers for some time), it becomes readily apparent that most of the effort goes into what is referred to as the “method.”

The following are the method available in supply and production planning.

  • MRP
  • DRP
  • Heuristic
  • Allocation
  • Cost Optimization
  • Inventory Optimization and Multi-Echelon

How Supply and Production Planning Implementations Tend to Play Out

There tends to be a great focus on the method used for supply and production planning. On most projects, that I have either implemented or evaluated, most of the resources and emphasis goes into setting up the method, training users on the user interface, building data interfaces, etc.. What time is left over on the implementation goes to parameter setting? How many times has a company made no addition to headcount to manage parameters, expecting the software they purchase to do this automatically for them?

When companies move from one method to a more sophisticated approach (for instance, MRP to cost optimization), it is usually the case that the company will have not yet mastered their parameters. This means that they will, I think in the vast majority of cases, have not come close to optimizing the software they currently use, before moving onto the next software package.

However, outside of inventory optimization and multi echelon (which is still lightly installed) none of the planning methods do anything to help set those parameters. This does not mean the functionality does not exist to do this — it does. But the software expects intelligence from the implementing company to set up the software to do so.

Safety stock and service levels are two of the most important of these supply and production planning parameters.

In the presentation, I will provide the following:

  1. The Appropriate Context: The background for the reasons that safety stock and service level, as well as the other parameters, end up, so sub-optimized.
  2. Improvement Opportunities and Rought Effort Estimates: How to improve this condition at a reasonable expense of time and money.
  3. Actual calculations: I will show calculations that explain how this can be accomplished using several test cases that can meet all of the objectives that I layout at the beginning of the presentation.

Conclusion

This presentation was interesting for all parties. As a presenter what I found quite interesting was that many of the participants were surprised by how little support there is for companies determination of service levels. There are extremely few companies that can model their service levels.

To find out more about the Foresight Conference see this link.

Remote Supply Planning Consulting

  • Questions About This Area?

    The software space is controlled by vendors, consulting firms and IT analysts who often provide self-serving and incorrect advice at the top rates.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, tell us your question below.

A number of the concepts presented lead into the Brightwork Explorer.

Brightwork MRP & S&OP Explorer

Improving Your Supply Planning, MRP & S&OP Software

Brightwork Research & Analysis offers the following supply planning tuning software, which is free to use in the beginning. See by clicking the image below:

References

Safety Stock and Service Level Book

Safety Stock

Safety Stock and Service Levels: A New Approach

Important Features About Safety Stock

Safety stock is one of the most commonly discussed topics in supply chain management. Every MRP application and every advanced planning application on the market has either a field for safety stock or can calculate safety stock. However, companies continue to struggle with the right level to set it. Service levels are strongly related to safety stock. However, companies also struggle with how to set service levels.

How Systems Set Safety Stock

The vast majority of systems allow the setting of safety stock by multiple means (static, dynamic, adjustable with the forecast in days’ supply, etc..). However, most systems do not allow the safety stock to be set in a way that is considerate of the inventory that is available to be applied.By reading this book you will:

  • Understand the concepts and formula used for safety stock and service level setting.
  • Common ways of setting safety stock.
  • Service levels and inventory optimization applications.
  • The best real ways of setting both service levels and safety stock.

Chapters

Chapter 1: Introduction
Chapter 2: Safety Stock and Service Levels from a Conceptual Perspective
Chapter 3: The Common Ways of Setting Safety Stock
Chapter 4: The Common Issues with Safety Stock
Chapter 5: Common Issues with Service Level Setting
Chapter 6: Service Level Agreement
Chapter 7: Safety Stock and Service Levels in Inventory Optimization and Multi-Echelon Software
Chapter 8: A Simpler Approach to Comprehensively Setting Safety Stock and Service Levels

Stock Levels by Profitability and Inventory Holding Cost

Executive Summary

  • Service levels and inventory holding costs must be socialized within companies so that the right service levels can be selected. One of the best ways of showing this relationship is with the service level inventory curve. The service level inventory curve shows the costs of attaining various service levels.

Introduction

There is a public relationship between service level and stock levels. A significant part of supply chain management is keeping service levels high while keeping inventories low. Although this probably oversimplifies the scenario a bit. It also involves keeping production efficiency high, and transportation costs low.

There are in fact many trade-offs that can be analyzed in supply chain management. But for this article, we will investigate the trade-off between service level and inventory holding cost.

The Service Level Versus Inventory and Inventory Holding Cost and Holding Costs Curve

One of the more frequently shown diagrams in inventory management is the service level versus stock curve. I have one such curve in the chart below.

This service level is the case service level — rather than the order line service level — which will be lower. The case service level takes merely all cases fulfilled and divides by all cases demanded. However, I use the case service level because it is the service level which is the basis for dynamic safety stock calculation. 

The service level versus inventory curve is essential in communicating that the amount of stock increases disproportionately with increases in service level.

This is why it can be infeasible to maintain the desired service levels often proposed by companies as their goals.

Socializing the Inventory/Service Level Curve

I believe this curve — with the company’s data should be shown to executive decision makers. I say this because few know how quickly the costs increase as service levels are increased. That is raised to the levels that they routinely propose as not only desirable but necessary.

A Model for Calculating the Costs of Service Level

We will start off by using the service level versus the cost curve. However, before we do this, we need to use some assumptions. Each set of assumptions will, of course, lead to a different outcome regarding the costs of service level. So we will test several scenarios. The best way to keep these scenarios straight is by using a table. The table below catalogs our scenarios.

Two costs are traded off. One is the cost of a lost sale, which is typically calculated as the multiple of the margin of the product. The cost of lost sales is then given by the following formula.

Total Demand * (1-Service Level) * Gross Margin * Margin Multiple

The table below calculates this cost for the different scenarios. To save space the columns that are labeled “CLS at XYZ%” means — the “Costs of Lost Sales at XYZ Service Level.” The column titled “ICC” stands for “Inventory Carrying Cost.”

Costs of Service Level Scenarios - Cost of Lost Sales

Scenario NameCostMarginICCCLS at 85%CLS at 85%CLS at 90%CLS at 95%CLS at 99%
Low Profit Items - High Carry Cost$50$1520%$6000$4500$3000$1500$300
Low Profit Items - Low Carry Cost$50$2025%$8000$6000$4000$2000$400
High Profit Items - High Carry Cost$50$5012.5%$20,000$15,000$10,000$5000$1000
High Profit Items - Low Carry Cost$50$7015%$28,000$21,000$14,000$7000$1400

On the other side is the cost of maintaining the inventory. This is given by the following formula.

Total Inventory Units * The Cost of the Inventory * Inventory Holding Cost

The table below calculates this cost for the different scenarios. To save space the columns that are labeled “COI at XYZ%” means — the “Costs of Inventory at XYZ Service Level.”

Costs of Service Level Scenarios - Inventory Costs

Scenario NameCostMarginICCCOI at 85%COI at 85%COI at 90%COI at 95%COI at 99%
Low Profit Items - High Carry Cost$50$1520%$1510$1870$2310$2960$4190
Low Profit Items - Low Carry Cost$50$2025%$1888$2338$2888$3700$5238
High Profit Items - High Carry Cost$50$5012.5%$944$1169$1444$1850$2619
High Profit Items - Low Carry Cost$50$7015%$1133$1403$1733$2220$3143

Now all that we have to do is subtract the two costs from each other for each combination. If the value is positive, this means that more money is lost due to lost sales versus the costs of maintaining inventory. If the values are negative, this means that the cost of maintaining inventory is higher than the costs of lost sales.

Costs of Service Level Scenarios - Net Costs

Scenario NameCostMarginICCCOI at 85%COI at 85%COI at 90%COI at 95%COI at 99%
Low Profit Items - High Carry Cost$50$1520%$4490$2630$690-$1460-$3890
Low Profit Items - Low Carry Cost$50$2025%$6113$3663$1113-$1700-$4838
High Profit Items - High Carry Cost$50$5012.5%$19,056$13,831$8556$3150-$1619
High Profit Items - Low Carry Cost$50$7015%$26,868$19,598$12,268$4780-$1734

Notice that the costs are positive — meaning service level increases continue to make sense until the service level begins to range from 95% to 99%.

At this service level, the inventory carries cost exceeds the cost of lost sales for the low margin item and then becomes negative for both at the 99% level.

Conclusion

There is a way to determine the trade-off between costs and of inventory holding cost and holding costs and higher service levels. Optimally a logical and mathematical analysis of this type would be how the company would develop its service level and inventory strategy.

This calculation can be performed in aggregate. That is either taking averages of all items, or aggregates of product groups. Or it can be applied to an individual product either for all locations or a single location. Both inventory holding cost and holding costs, as well as the quantification of the benefits of incremental service level improvements, are challenging to calculate.

Applications, like inventory optimizers, often assume that service levels are known by companies. In fact, their service levels targets are most often guestimates driven by sales of the service level they would like to have. Few companies have a mechanism for determining service levels based on trade-offs.

Remote Supply Planning Consulting

  • Questions About This Area?

    The software space is controlled by vendors, consulting firms and IT analysts who often provide self-serving and incorrect advice at the top rates.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, tell us your question below.

Brightwork MRP & S&OP Explorer for S&OP

Tuning ERP with S&OP

MRP and supply planning systems can be tuned with S&OP inputs. Brightwork MRP & S&OP Explorer provides this tuning, which is free to use in the beginning. See by clicking the image below:

References

Plossl, George. Orlicky’s Material Requirement’s Planning. Second Edition. McGraw-Hill. 1984. (first edition 1975)

Plossl, George. Wight, Oliver. Production and Inventory Control: Principles and Techniques. Prentice Hall. 1967.

I cover this topic in detail in the following book.

Safety Stock and Service Level Book

Safety Stock

Safety Stock and Service Levels: A New Approach

Important Features About Safety Stock

Safety stock is one of the most commonly discussed topics in supply chain management. Every MRP application and every advanced planning application on the market has either a field for safety stock or can calculate safety stock. However, companies continue to struggle with the right level to set it. Service levels are strongly related to safety stock. However, companies also struggle with how to set service levels.

How Systems Set Safety Stock

The vast majority of systems allow the setting of safety stock by multiple means (static, dynamic, adjustable with the forecast in days’ supply, etc..). However, most systems do not allow the safety stock to be set in a way that is considerate of the inventory that is available to be applied.By reading this book you will:

  • Understand the concepts and formula used for safety stock and service level setting.
  • Common ways of setting safety stock.
  • Service levels and inventory optimization applications.
  • The best real ways of setting both service levels and safety stock.

Chapters

Chapter 1: Introduction
Chapter 2: Safety Stock and Service Levels from a Conceptual Perspective
Chapter 3: The Common Ways of Setting Safety Stock
Chapter 4: The Common Issues with Safety Stock
Chapter 5: Common Issues with Service Level Setting
Chapter 6: Service Level Agreement
Chapter 7: Safety Stock and Service Levels in Inventory Optimization and Multi-Echelon Software
Chapter 8: A Simpler Approach to Comprehensively Setting Safety Stock and Service Levels

Software Ratings: Supply Planning

Software Ratings

Brightwork Research & Analysis offers the following free supply planning software analysis and ratings. See by clicking the image below:

software_ratings

Should Non Finished Goods Safety Stock be Carried?

Executive Summary

  • Safety stock is how stock is kept to account for variability.
  • George Plossl discussed how safety stock ruins the credibility of MRP, and whether safety stock should be applied to raw materials and components. Safety stock changes for make to stock versus assemble to order.

Introduction to Safety Stock

Safety stock is the quantity of stock carried to manage supply and demand variability. Cycle stock is the stock carried between the order cycle, and safety stock + cycle stock = the total stock.

Setting Safety Stock for Different Material Types

Any supply planning system has a safety stock setting at the product location combination. This means that all materials, be they finished goods, raw materials, components, etc.. have the ability to have safety stock set for them at every location where they are created in the system.

A question which many companies have, and which is infrequently answered is how safety stock be set at each location? Should one apply the same rule of safety stock policy for each material type?

George Plossl was one of the deepest thinkers on MRP and inventory management. He had some interesting observations on this topic, as can be seen from the quotation below:

Plossl On: Does Safety Stock Ruin the Credibility of MRP?

“Safety stock has little, if any legitimate role in MRP, however, which provides forward visibility of planned requirements and orders for raw materials and components and can replan easily. When safety stock is added to MRP, the resulting overstated requirements and false timing of order release and due dates destroy credibility. Factory personnel quickly discover order due dates, believing that safety stock is available and that orders are scheduled for completion before they are needed. Missed delivery dates without customers’ quick and strong reactions give suppliers clear evidence that their purchase order due dates are padded.”

That is a curious statement and one which is not well known. This is quite strange as it is unheard of to use MRP without safety stock.

Plossl On: What is the Primary Purpose of Safety Stock?

“The primary purpose of safety stock is to provide cushions against fluctuations in demand (forecast error) and supply (upsets in production). Demand for raw materials and components are calculated by MRP and therefore, are not subject to forecast errors. Experience with safety stock in MRP has shown clearly that the cushions are rarely found on items affected by users, nor are they large enough to be useful. Better understanding of the importance of smooth, fast flow of materials and flexibility of operations led to the realization that the causes of upsets had to be eliminated. Efforts to do this proved successful and yielded enormous benefits far beyond the costs in incurred.”

This paragraph requires rereading several times (at least it did for us). But it seems to be saying that the safety stock of the finished goods is not large enough to be useful or worthwhile. And the quote seems to take the view of Lean proponents that it covers up the reasons for the variability.

Plossl On: Should Safety Stock be Applied to Raw and Component Levels?

“Safety stock is properly only to inventory items subject to independent demand. These include stocked finished products, service parts and MPS end items….(safety stocks) should not be duplicated at raw materials and component levels.

Another function of safety stock is protection against uncertainly of supply. It can be useful sometimes on an item whose supply is erratic and beyond the control of people in the plant, characteristic of some purchased items. Safety stock will be wasted when production of manufactured items is erratic and unpredictable; planning cannot be sound in chaotic environments.” – Orlicky’s Material Requirement’s Planning

The synopsis of this quotation is that safety stock should only be carried at the finished good. And for firm make to stock environments this makes sense — especially where there is not overlap or shared raw materials and finished goods. The table below is an example of this type of scenario along with the scenario of assemble to order.

Make to Stock and Assemble to Order Scenarios

Material TypeMaterialMTS Scenario 1 - Used by Which Finished Good BOM?ATO Scenario 2 - Used by Which Finished Good BOM? 
Finished GoodTable Type 1N/AN/A
Finished GoodTable Type 2N/AN/A
Raw MaterialWood Type 1Only for Table Type 1All
Raw MaterialWood Type 2Only for Table Type 2All
Raw MaterialWood GlueAllAll
ComponentLegsNot Interchangeable Between Table 1 and 2.All
ComponentJoinsNot Interchangeable Between Table 1 and 2.All
ComponentTable TopNot Interchangeable Between Table 1 and 2.All

Make to Stock Scenario – No Interchangeability

Notice that in the first scenario – it makes no sense to carry safety stock at the raw material. This is because all of the variability is accounted for in the finished good.

Assemble to Order Scenario – Interchangeability

In the second scenario, things change because the components and raw materials are now interchangeable. This means that the company can follow an assemble to order strategy. This means they do not have to forecast the demand for both Table Type 1 and Table Type 2 but need to create a combined forecast.

It means they can also choose to create safety stock at the raw materials and components — and reduce it at the finished good. How much they can do this depends on the final assembly lead time.

There are two options:

  • If the Final Assembly Time is — Combined with the Delivery Time <(Smaller Than) the Customer Lead Time
  • If the Final Assembly Time is — Combined with the Delivery Time >(Greater Than) the Customer Lead Time

Let us get into each option in detail.

If the Final Assembly Time is — Combined with the Delivery Time < the Customer Lead Time

The company can switch all of its safety stock from finished goods to raw materials and components – removing the safety stock that is carried at the finished good.

If the Final Assembly Time is — Combined with the Delivery Time > the Customer Lead Time

Some safety stock can be funding can be re-allocated from the finished goods to the raw materials and the components. The longer the final assembly + delivery time is versus the customer lead time, the less safety stock can be re-allocated from finished goods to raw materials and components.

The movement and interchangeability of components change the inventory that must be held. This can be seen by looking at the how forecast error changed when the demand for finished goods can be combined when there is component interchangeability.

Material TypeMaterial January ForecastJanuary DemandIndividual Forecast ErrorCombined Forecast Error
Finished GoodTable Type 120017512.5%2.8%
Finished GoodTable Type 215016510%
Average Error11.25%2.8%

Different individual forecast scenarios lead to different error improvements. For instance, if the sales move in the same rather than in opposite directions, as I have shown above, the forecast error reduction is less. 

Material TypeMaterial January ForecastJanuary DemandIndividual Forecast ErrorCombined Forecast Error
Finished GoodTable Type 120017512.5%11.46%
Finished GoodTable Type 215013510%
Average Error11.25%11.46%

In this case the error seems higher with the aggregated value — however, I just took an average rather than weighing the forecast error by the forecast size. If I weighted the forecast error, the forecast error for the divided forecast would be higher. 

The Reality of Make to Order Versus Assemble to Order

Assemble to order manufacturing is preferable to make to stock.

Make to order is the most preferable, but make to order is not feasible. That is it is not feasible except for a small portion of the overall product database of most companies. This is true outside of specialized industries like aerospace and defense.

No company makes a fighter jet without a firm order in hand. Make to order has a very high bar. The customer lead time must be greater than the overall manufacturing lead time + the procurement lead time + the delivery time. The bar for assemble order is much lower. It is the final assembly time + the delivery time.

Many companies speak of moving to make to order but assemble to order a much more realistic goal. And as can be seen, it has beneficial effects on inventory management. To implement assemble to order two important prerequisites must exist:

  1. Assemble to Order Lead Time: This should not be confused with the overall manufacturing lead time — but this value + the delivery time must be shorter than the customer lead time.
  2. Interchange-ability: The finished goods must have a degree of interchangeability between raw materials or components. However, it is important to note that not all raw materials and components in the bill of material need to be interchangeable. If less expensive raw materials or components are not interchangeable, infrequent orders, high stock, and safety stock can be carried on them at little cost. If on the other hand the more expensive raw materials or components are not interchangeable — then it makes it less likely that the assemble to order strategy can be followed.

Conclusion

Where the safety stock is set in the bill of materials goes hand in glove with the type of environment that is being modeled.

  • For a pure make to stock environment, George Plossl makes a good argument that safety stock should be allocated to the finished good.
  • Something that is little discussed is that most companies cannot carry all of the safety stock that the standard calculations calculate they should.

This means taking a limited amount of safety stock and allocating it across a product location database in the best possible way.  So it also means that safety stock should not be calculated for each product location independently.

Remote Supply Planning Consulting

  • Questions About This Area?

    The software space is controlled by vendors, consulting firms and IT analysts who often provide self-serving and incorrect advice at the top rates.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, tell us your question below.

Brightwork MRP & S&OP Explorer for Safety Stock

Safety Stock Calculation

The way safety stock is set and sometimes calculated is highly imprecise and problematic. What is needed is a way of calculating safety stock dynamically that is performed in an integrated manner with both constraints and service levels. The Brightwork MRP & S&OP Explorer does exactly this, and it is free to use in the beginning until it sees “serious usage.” It is permanently free to academics and students. See by clicking the image below:

References

Lean and Reorder Point Planning Book


Lean and Reorder Point 2

Lean and Reorder Point Planning: Implementing the Approach the Right Way in Software

A Lost Art of Reorder Point Setting?

Setting reorder points is a bit of a lost art as company after company over-rely upon advanced supply planning methods to create the supply plan. Proponents of Lean are often in companies trying to get a movement to Lean. However, how does one implement Lean in software?

Implementing Lean in Software

All supply planning applications have “Lean” controls built within them. And there are in fact some situations where reorder points will provide a superior output. With supply planning, even within a single company, it is not one size fits all. The trick is understanding when to deploy each of the approaches available in software that companies already own.

Are Reorder Points Too Simple?

Reorder points are often considered to be simplistic, but under the exact circumstances, they work quite well.

There are simply a great number of misunderstandings regarding reorder points – misunderstandings that this book helps clear up.

Rather than “picking a side,” this book shows the advantages and disadvantages of each.

  • Understand the Lean Versus the MRP debate.
  • How Lean relates to reordering points.
  • Understand when to use reorder points.
  • When to use reorder points versus MRP.
  • The relationship between forecastability and reorder points.
  • How to mix Lean/re-order points and MRP to more efficiently perform supply planning.

Chapters

  • Chapter 1: Introduction
  • Chapter 2: The Lean versus MRP Debate.
  • Chapter 3: Where Supply Planning Fits Within The Supply Plan
  • Chapter 4: Reorder Point Planning
  • Chapter 5: Lean Planning.
  • Chapter 6: Where Lean and Reorder Points are Applicable
  • Chapter 7: Determining When to use Lean Versus MRP
  • Chapter 8: Mixing Lean and Reorder Points with MRP-Type Planning

How to Use the Internet Based Reverse Dynamic Safety Stock Calculator

Executive Summary

  • Introduction to Reverse Safety Safety Stock
  • How the Safety Stock Calculator Form Works
  • What this Safety Stock Calculator Is
  • The Safety Stock Calculator

Introduction to the Reverse Safety Stock Calculator

This dynamic safety stock calculator is designed to do the following:

  • Calculate safety stock.
  • Explain the logic behind the mathematics of the dynamic safety stock calculator.

Every safety stock calculator that I was able to find uses the traditional calculation where the final output is the safety stock level. Sometimes you want to set an inventory level, and then see what the service level will be. This is the exact opposite or reverse of how the dynamic safety stock formula calculates.

The dynamic safety stock formula does not provide an easy way to do this. Through a slight adjustment, I have enabled this. It is determined by using this calculation form – although it is a two-step rather than one step process.

What This Safety Stock Calculator Is

The standard dynamic safety stock calculator is problematic in actual usage. For this reason, I created this safety stock calculator which adopts some of the same concepts. But it provides more consistent output. Currently, the calculator does not include lead time variability. In most cases, the vast majority of variability is from the demand rather than lead time side.

How the Safety Stock Calculator Form Works

This form requires input to provide output. However, it also has default values. You can change any input value and the rest of the formula — the output will change immediately. You can continue making changes, and the form will always update without having to press any button or refresh.

Steps to Using the Form

  1. The form requires that you first submit the input.
  2. Next check if the safety stock difference between the calculated value and the safety stock you enter is positive or negative.
  3. It then requires that you adjust the service level until you have a small safety stock difference. This is then the service level you can expect from the safety stock which you have entered.

Note: For some reason, the drop-down field below does not appear to work in Firefox – so if you are using that browser try a different one. Second, when you enter a decimal into the Standard Deviation of Demand and Standard Deviation of Lead Time, you may receive a message “Please enter only digits.” You can ignore that message. The calculator works fine with a decimal point.

For the standard dynamic safety, stock calculator see this article.

Remote Supply Planning Consulting

  • Questions About This Area?

    The software space is controlled by vendors, consulting firms and IT analysts who often provide self-serving and incorrect advice at the top rates.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, tell us your question below.

Brightwork MRP & S&OP Explorer for Safety Stock

Safety Stock Calculation

The way safety stock is set and sometimes calculated is highly imprecise and problematic. What is needed is a way of calculating safety stock dynamically that is performed in an integrated manner with both constraints and service levels. The Brightwork MRP & S&OP Explorer does exactly this, and it is free to use in the beginning until it sees “serious usage.” It is permanently free to academics and students. See by clicking the image below:

References

Safety Stock and Service Level Book

Safety Stock

Safety Stock and Service Levels: A New Approach

Important Features About Safety Stock

Safety stock is one of the most commonly discussed topics in supply chain management. Every MRP application and every advanced planning application on the market has either a field for safety stock or can calculate safety stock. However, companies continue to struggle with the right level to set it. Service levels are strongly related to safety stock. However, companies also struggle with how to set service levels.

How Systems Set Safety Stock

The vast majority of systems allow the setting of safety stock by multiple means (static, dynamic, adjustable with the forecast in days’ supply, etc..). However, most systems do not allow the safety stock to be set in a way that is considerate of the inventory that is available to be applied.By reading this book you will:

  • Understand the concepts and formula used for safety stock and service level setting.
  • Common ways of setting safety stock.
  • Service levels and inventory optimization applications.
  • The best real ways of setting both service levels and safety stock.

Chapters

Chapter 1: Introduction
Chapter 2: Safety Stock and Service Levels from a Conceptual Perspective
Chapter 3: The Common Ways of Setting Safety Stock
Chapter 4: The Common Issues with Safety Stock
Chapter 5: Common Issues with Service Level Setting
Chapter 6: Service Level Agreement
Chapter 7: Safety Stock and Service Levels in Inventory Optimization and Multi-Echelon Software
Chapter 8: A Simpler Approach to Comprehensively Setting Safety Stock and Service Levels

How to Best Calculate Reorder Points

Executive Summary

  • This is an introduction to reorder points and how to use the reorder level vs the reorder quantity.
  • The Brightwork ROP calculator sets a dynamic reorder point.

Introduction to Reorder Points

As discussed in this article, reorder level and reorder quantity are both significantly underused in companies and can be set some ways in systems like SAP SNP. You will learn about reorder points and how they are set in production systems.

The Significant of Reorder Points

Reorder level and reorder quantity planning is significantly underestimated. This is because companies so frequently overestimate their ability to effective forecast. Most companies don’t have the capacity to leverage even basic forecasting functionality which is available. This functionality has been available within forecasting applications for years.

Reorder level and reorder quantity work well for both highly forecastable products and products that are difficult to forecast. Any product which received a level forecast assignment using a best fit procedure can have their supply planning emulated by using a reorder point.

By placing a substantial portion of the company’s product database on reordering level and reorder quantity there are several benefits.

  • It saves time.
  • It allows the company to focus on those products that can be improved through forecasting.

The graphic below explains this.

Forecast Error Assignment

Order Point Versus Reorder Point

The term order point is infrequently used. People most often use the term reorder point rather than order point. However, order point and reorder point are the same thing. An order point is a level of inventory where an order is generated. Rather than an order point, a reorder point simply implies that the ordering is perpetual.

The Uses of Dynamic Reorder Level and Reorder Quantity

The beautiful thing about the dynamically reorder point calculation is that it adjusts across the following dimensions:

  • Service level
  • Lead time and forecast error both in variability (for lead time and forecast error) as well as lead time duration.

Dynamic Reorder point analysis can be used for an SKU or any aggregation level. For instance, this form can be used to model the inventory and supply chain of an entire company. Instead of entering the values for a single SKU, the overall or average values can be used.

This allows one to see the relationships between things like service level and the total amount of stock carried. This can also be used to create a service level to inventory curve. An inventory service curve is something which many companies do not have.

It will not, of course, include the total stocking level. So the total stocking level should be estimated and added. Only the reorder point should flex — while the cycle stock should stay the same.

Using Dynamic Reorder Level and Reorder Quantity in Production Systems

As is discussed in this article, reorder points can be set some ways in systems like SAP SNP, ToolsGroup or Demand Works Smoothie.

Most importantly, they can set to work without a forecast or with a forecast.

One of the of the confusing things about setting up a reorder level and reorder quantity is what to do with the forecast that has been generated for the products that are moved to reorder level and reorder quantity or reorder point. A prediction is still required for things like budgeting. It still makes sense to generate a forecast for them. Another reason for this is that products that are set on reorder point — don’t necessarily stay on reorder point in the future — and vice versa.

The demand history will tell the company when a product should be moved to reorder point planning. It will also tell the company when a product should be moved away from reordering point planning. That is when it is to become an actively forecasting item.

What Makes This Reorder Point Calculator Unique

Most of the reorder point calculators that online calculate a static reorder point typically based upon just lead time, safety stock, stock, and sales. There is no measure of variability in either lead times or the forecast, and it asks the user to input the safety stock as well as the stock. However, variability dramatically changes the safety stock – which is part of the reorder point calculation. Most of these online calculators are not helpful to people need to see the relationships between multiple factors and who don’t have the stock information and require estimates.

The authors seem to have put in the absolute minimum level of work so that they could say their website has a safety stock calculator.

This calculator below does not ask for existing stock or safety stock but does ask for variability. If the variability is not known, then zero standard deviations can be added to the form — to mostly hold those values static.

ROP Formula, or Reorder Point Formula

  • An ROP formula or reorder point formula are all synonyms for the same thing.
  • A ROP formula or reorder point formula are all used to determine the reorder point.
  • The reorder quantity formula shows the amount to be ordered once the reorder point is reached. A reorder quantity formula is often called an economic order quantity.

How the Calculation Form Works

This reorders point calculator provides the intermediate values, along with explanations so that the overall logic of the dynamically reorder point calculator can be fully understood by both students and practitioners.

This form requires input to provide output. However, it also has default values. You can change any input value and the rest of the formula — the output will change immediately. You can continue making changes, and the form will always update without having to press any button or refresh.

Note: For some reason, the drop down field below does not appear to work in Firefox – so if you are using that browser try a different one. Second, when you enter a decimal into the Standard Deviation of Demand and Standard Deviation of Lead Time, you may receive a message “Please enter only digits.” You can ignore that message. The calculator works fine with a decimal point.

To determine the EOQ, see the EOQ calculator see this link.

Remote Supply Planning Consulting

  • Questions About This Area?

    The software space is controlled by vendors, consulting firms and IT analysts who often provide self-serving and incorrect advice at the top rates.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, tell us your question below.

Brightwork MRP & S&OP Explorer for Order Optimization

Order Sizing and Optimization

Order optimization is necessary in order to get the predicted value from ERP and other supply planning applications. The Brightwork MRP & S&OP Explorer does exactly this, and it is free to use in the beginning until it sees “serious usage.” It is permanently free to academics and students. See by clicking the image below:

References

Lean and Reorder Point Planning Book


Lean and Reorder Point 2

Lean and Reorder Point Planning: Implementing the Approach the Right Way in Software

A Lost Art of Reorder Point Setting?

Setting reorder points is a bit of a lost art as company after company over-rely upon advanced supply planning methods to create the supply plan. Proponents of Lean are often in companies trying to get a movement to Lean. However, how does one implement Lean in software?

Implementing Lean in Software

All supply planning applications have “Lean” controls built within them. And there are in fact some situations where reorder points will provide a superior output. With supply planning, even within a single company, it is not one size fits all. The trick is understanding when to deploy each of the approaches available in software that companies already own.

Are Reorder Points Too Simple?

Reorder points are often considered to be simplistic, but under the exact circumstances, they work quite well.

There are simply a great number of misunderstandings regarding reorder points – misunderstandings that this book helps clear up.

Rather than “picking a side,” this book shows the advantages and disadvantages of each.

  • Understand the Lean Versus the MRP debate.
  • How Lean relates to reordering points.
  • Understand when to use reorder points.
  • When to use reorder points versus MRP.
  • The relationship between forecastability and reorder points.
  • How to mix Lean/re-order points and MRP to more efficiently perform supply planning.

Chapters

  • Chapter 1: Introduction
  • Chapter 2: The Lean versus MRP Debate.
  • Chapter 3: Where Supply Planning Fits Within The Supply Plan
  • Chapter 4: Reorder Point Planning
  • Chapter 5: Lean Planning.
  • Chapter 6: Where Lean and Reorder Points are Applicable
  • Chapter 7: Determining When to use Lean Versus MRP
  • Chapter 8: Mixing Lean and Reorder Points with MRP-Type Planning

How to Use the Brightwork Internet Based Dynamic Safety Stock Calculation

Executive Summary

  • This article introduces the dynamic safety stock calculation and reviews the current safety stock calculation explanations.
  • There is a common preference for talking about the standard dynamic safety stock calculation rather than diving into its math.
  • We cover how to use the dynamics safety stock in production systems.

Introduction to Calculating Safety Stock

This dynamic safety stock calculation article has two purposes:

  • To calculate safety stock.
  • To explain the logic behind the mathematics or the safety stock equation of the dynamic safety stock calculator.

Reviewing the Current Safety Stock Calculation Explanations

Before writing this article and creating this calculator I reviewed quite a few of the available safety stock calculation spreadsheets available from the Internet. I found all to be deficient in not fully explaining the formula.

  • Almost every one of them asked for a service level input. They did not even explain what the definition of the service level calculation definition to be used.
  • The vast majority ignored the lead time component of the formula. They only provided input for sales/forecast variability (error).

This is not a good way to explain how dynamic safety stock works. Those that left out part of safety stock calculation formulas or safety stock equation did not even explain that it was left out — giving any person who is trying to understand the entire formula a difficult time! How can one know the right for calculating safety stock without showing those assumptions?

The Preference for Talking About the Dynamic Safety Stock Rather than Diving into the Math

It seems as if many people want to talk about dynamic safety stock. No one was interested in making a clear calculator that explains calculating safety stock in clear terms.

There is a broader problem with the formula in that most of the explanations of the formula are not specific enough as to what the author is referring to.

  • For instance, what is “Average Demand.” Without knowing the duration, this does not mean very much of anything.
  • Is this the average over lead time, or the monthly average, the yearly average?

This safety stock calculator provides the intermediate values. It also provides explanations so that the overall logic of the dynamic safety stock calculator can be understood by both students and practitioners.

Basic Concept of Dynamic Safety Stock

The basic concept of the dynamic safety stock calculation is to adjust the safety stock per multiple factors.

Often the explanation of dynamic safety stock is that it is to adjust for both supply and demand variability — as is expressed in the graphic below:

Safety Stock-2

The Uses of Dynamic Safety Stock

The nice thing about the dynamic safety stock calculation or safety stock equation is that it adjusts across the following dimensions:

  • Service level
  • Lead time
  • Forecast error both in variability (regarding lead time and forecast error) as well as lead time duration.

Dynamic safety stock analysis can be used for an SKU or any aggregation level. For instance, this form can be used to model the inventory and supply chain of an entire company.

That is instead of entering the values for a single SKU; the average values can be used. This helps one see the relationships between things like service level and the total amount of stock carried.

This can create a service level to inventory curve. This is something which many companies do not have. It will not, of course, include the total stocking level. So the total stocking level should be estimated and added. Only the safety stock should flex — while the cycle stock should stay the same.

Using Dynamic Safety Stock in Production Systems

While dynamic safety stock is quite valuable for analysis, one of the problems with dynamic safety stock is that it will often calculate a value which companies consider too high. Typically companies will not hold this level of safety stock as is explained in this article. This is because of the fact that the standard dynamic safety stock formula in textbooks does not work, and consistently overestimates the safety stock required.

What This Calculation Is

  • The standard dynamic safety stock calculator is problematic in actual usage. For this reason, I created this safety stock calculator which adopts some of the same concepts but provides more consistent output.
  • Currently, the calculator does not include lead time variability. In most cases, the vast majority of variability is from the demand rather than lead time side.

How the Brightwork Safety Stock Calculation Form Works

This safety stock calculation is not the standard dynamic safety stock. It is instead our own customized dynamic safety stock. 

This form requires input to provide output. However, it also has default values. You can change any input value and the rest of the formula — the output will change immediately. You can continue making changes, and the form will always update without having to press any button or refresh. This will accurately support you in calculating safety stock.

Note: For some reason, the drop-down field below does not appear to work in Firefox – so if you are using that browser try a different one. Second, when you enter a decimal into the Standard Deviation of Demand and Standard Deviation of Lead Time, you may receive a message “Please enter only digits.” You can ignore that message. The calculator works fine with a decimal point.

For the reverse safety stock calculator sees this link.

Remote Supply Planning Consulting

  • Questions About This Area?

    The software space is controlled by vendors, consulting firms and IT analysts who often provide self-serving and incorrect advice at the top rates.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, tell us your question below.

Brightwork MRP & S&OP Explorer for Safety Stock

Safety Stock Calculation

The way safety stock is set and sometimes calculated is highly imprecise and problematic. What is needed is a way of calculating safety stock dynamically that is performed in an integrated manner with both constraints and service levels. The Brightwork MRP & S&OP Explorer does exactly this, and it is free to use in the beginning until it sees “serious usage.” It is permanently free to academics and students. See by clicking the image below:

References

Safety Stock and Service Level Book

Safety Stock

Safety Stock and Service Levels: A New Approach

Important Features About Safety Stock

Safety stock is one of the most commonly discussed topics in supply chain management. Every MRP application and every advanced planning application on the market has either a field for safety stock or can calculate safety stock. However, companies continue to struggle with the right level to set it. Service levels are strongly related to safety stock. However, companies also struggle with how to set service levels.

How Systems Set Safety Stock

The vast majority of systems allow the setting of safety stock by multiple means (static, dynamic, adjustable with the forecast in days’ supply, etc..). However, most systems do not allow the safety stock to be set in a way that is considerate of the inventory that is available to be applied.By reading this book you will:

  • Understand the concepts and formula used for safety stock and service level setting.
  • Common ways of setting safety stock.
  • Service levels and inventory optimization applications.
  • The best real ways of setting both service levels and safety stock.

Chapters

Chapter 1: Introduction
Chapter 2: Safety Stock and Service Levels from a Conceptual Perspective
Chapter 3: The Common Ways of Setting Safety Stock
Chapter 4: The Common Issues with Safety Stock
Chapter 5: Common Issues with Service Level Setting
Chapter 6: Service Level Agreement
Chapter 7: Safety Stock and Service Levels in Inventory Optimization and Multi-Echelon Software
Chapter 8: A Simpler Approach to Comprehensively Setting Safety Stock and Service Levels

How to Best Understand Supply Chain Inventory

Executive Summary

  • Considering inventory it is necessary to understand why it is held.
  • We cover the components that makeup inventory that is held.

Introduction

In supply planning, inventory is that product that his held in the company’s supply network to satisfy demand. In this article you will learn the various reasons for holding supply chain inventory. 

Inventory and the Manufacturing Environment

Finished goods inventory is necessary for make to stock environments. Component inventory is necessary in assemble to order environments. In make to order environments, if followed faithfully, no inventory should be necessary. Fundamentally inventory is necessary due to the lag between when a product is demanded, and when it can be supplied.

Sales and Statistical Forecasting Combined: Mixing Approaches for Improved Forecast Accuracy

Like the question of what is inventory, the reasons for holding inventory or stock inventory boil down to the fact the lead-times for production and procurement are longer than the customer demand lead-time.

Not all companies need to forecast all of their finished goods products. One example of this is defense contractors that frequently know years in advance, what they will build as they have firm contracts containing quantities and dates from the government.

However, even these companies are still required to create forecasts for the service parts that support the products that they sell.

How is Inventory Positioned? 

Inventory is positioned in different locations by the supply planning system. The assumptions that the software uses to perform positioning very much depends upon the supply planning method selected.

This is described in this article.

What Makes Up Inventory?

The total inventory at a location is the total stocking level, which is made up of cycle stock (the stock held between ordering) and safety stock (the stock designed to ensure there is enough stock to satisfy demand while mitigating demand and supply variability)

  • The total stocking level is not necessarily the correct amount of stock that should be held.
  • This is referred to as the target stocking level (only MEIO vendors refer to it like this, but it is quite a logical term)

What are the Functions of Inventory to Keep Inventory, or the Reasons for Holding Inventory and to Stock Inventory?

Fundamentally the functions of inventory are to allow the company or entity to have something available at the time of sale. The reason for holding inventory or to stock inventory is because, in the vast majority of cases, the lead time required by the customer, or the order period is shorter than the

The reason to keep inventory or to stock inventory is because, in the vast majority of cases, the lead time required by the customer, or the order period is shorter than the replenishment lead time. This is the reason to keep inventory or stock inventory because not to do so will result in not being able to fulfill demand.

Understanding how the various lead time connects is required to get to the essence of the functions of inventory.

The True Reasons for Holding Inventory

This is important to consider the true reasons for holding inventory. This is because many Lean inventory advocates propose that stock can be drastically cut and in fact refer to inventory as a liability.

That is technically inaccurate. When inventory is excessive that portion of the stock is a liability, but it is only really a liability if the inventory is either not used or if it is significantly marked down when sold.

The costs of carrying inventory for short periods of time is quite low. And of course, the cost of having a stock out is much higher than having too much inventory. Therefore the reasons for holding inventory really required illumination.

Conclusion

Inventory is controlled by the supply planning system and is designed to be moved and stocked to satisfy future demand. The reasons for holding inventory are often not fully explained and the costs of maintaining inventory versus not having inventory when it is needed, are in most situations not quantified.

Remote Supply Planning Consulting

  • Questions About This Area?

    The software space is controlled by vendors, consulting firms and IT analysts who often provide self-serving and incorrect advice at the top rates.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, tell us your question below.

Brightwork MRP & S&OP Explorer for Order Optimization

Order Sizing and Optimization

Order optimization is necessary in order to get the predicted value from ERP and other supply planning applications. The Brightwork MRP & S&OP Explorer does exactly this, and it is free to use in the beginning until it sees “serious usage.” It is permanently free to academics and students. See by clicking the image below:

References

Replenishment Triggers Book

Replenishment Triggers

Getting the Terminology Right

The terms make to order and make to stock roll quickly off of people’s tongues regardless of their knowledge of other supply chain conditions. Many executives speak about “moving to make to order environment.” For most companies, this simply is not realistic. And many businesses that say they do make to order/configure to order/engineer to order are doing assemble to order planning.

The Universality of The Manufacturing Environment Type

These terms are specific types of manufacturing environments. They are embedded in almost all supply planning applications ranging from the most basic ERP to the most sophisticated advanced planning system. However, each manufacturing environment leads to some implications, implications that are most often not completely understood.

Getting Clear on Requirements Strategies

Requirements strategies are what control what drives the replenishment of supply in systems. In most cases, the need strategies control whether the forecast or the sales order triggers replenishment.

This book cuts down the amount of time that is required for people in companies to understand the relationship between manufacturing environments (the business) and requirements strategies (the technology setting in the supply planning application).

By reading this book you will learn:

  • What are the major manufacturing environments and what determines which manufacturing environment a company follows?
  • How do the different manufacturing environments impact how inventory is carried?
  • How are the various production environments configured in software?
  • What is mass customization, and how accurate is useful is this concept in real life?
  • What is the interaction between variant configuration and the manufacturing environment and the bill of materials?

Chapters

Chapter 1: Introduction
Chapter 2: The Different Manufacturing Environments
Chapter 3: Triggering Replenishment
Chapter 4: Requirements Strategies
Chapter 5: The Make to Order Illusion
Chapter 6: The Limitations to the Concept of Mass Customization
Chapter 7: Forecast Consumption
Chapter 8: Variant Configuration in SAP ERP
Chapter 9: Conclusion

Software Ratings: Supply Planning

Software Ratings

Brightwork Research & Analysis offers the following free supply planning software analysis and ratings. See by clicking the image below:

software_ratings

The Probability of Success of Different Supply Planning Methods

What Does This Article Cover?

  • What are the Different Supply Planning Methods?
  • How does each Supply Planning Method Stack up in Terms of Implementation Success?
  • What does the Complexity of the Supply Planning Method used Have to do with Implementation Success?

Selecting software, and the method within the software primarily by both brand and simply the hypothetical capability of the software, without considering the company’s ability to implement complex systems, and the experiences and difficulties that other companies have had with the more complex supply planning methods do not make a lot of sense.

Introduction

The various methods of supply planning for advanced planning and scheduling are very different from one another. These methods, which are heuristics, allocation and cost optimization also differ greatly in their likelihood of being implemented successfully. During the software selection phase, typically a method is selected based on how well it meets the business requirements. Something which is left out of this analysis is the probability of success of the methods.

If one method provides all the things your business wants, but the company lacks the funding or expertise, or sustainable orientation to bring up a solution, it makes more sense to select a solution which can be implemented. It is extremely rare that I find that companies correctly estimate their abilities to bring up complex solutions. For instance, in the area of support, it is becoming increasingly common for companies to outsource support to India. 

However, the outsourced model was never designed for complex solutions like supply planning APS solutions which are some of the most complex systems that a company has.

Resolving issues requires a detailed understanding of the issues, domain expertise, the configuration history, etc.. It is not simply performing a password reset. Therefore, if a company wants to use outsourced support, to also not provide sufficient internal personnel for the implementation, etc…then the company should move towards an easier APS method and one which has a higher probability of success.

How the Different APS Methods Compare in Terms of Probability of Success

Heuristic

Heuristics have a very high success rate. The SAP SNP Network Heuristic is about as easy to use as MRP but has extra settings that require some analysis and troubleshooting. The SNP Heuristic is extremely fast and can be run as many times as per day because the heuristic provides the same result if it is run for the overall network as it does if it is run for a single location or a single product location combination. The SNP heuristic can also be run interactively which allows it to provide an instant update on the new situation.

CTM and Cost Optimization

However, there is a significant drop off in the success of the more complex methods which include allocation and cost optimization. Few companies have success with allocation or cost optimization. This is because this method is complex. There are both many screens of settings on each of these methods, but also these methods require detailed configuration and master data maintenance in the area of resources, as most companies that select these methods are interested in performing constraint based planning.

Additionally, allocation requires the development and maintenance of a table which declares which customers should receive inventory over others. In cost optimization, costs must be developed and maintained for the transportation costs between locations, the storage costs at a location, the costs of violating (dipping into) safety stock, the cost of production, and the costs of missing a demand.

All of this entails work, and this work must be appropriately staffed. It also requires a clear understanding and clear declaration of the policies and communication of these policies to the individuals who are maintaining the configuration and master data.

Conclusion

While APS offers many more settings and more functionality, it has not had as high implementation success rates as MRP/DRP, which at this point are nearly universal within companies of any substantial size. The reasons why can vary as much as the specific method of APS implemented (heuristic, cost-based optimization, or allocation), and the probability of success differs very significantly between with heuristics being on one side of the continuum, and cost-based optimization and allocation being on the other.

However, as a general statement, the APS has been criticized for being overly complex, which I also agree with. Part of the complexity is due to the method. However, the fact that some solutions like SAP SNP are so complex has to do with the decision made by a development organization. This is connected to another topic, which is that companies do not seem to be selecting for software that has been naturally designed to be easily implemented.

Companies that try to reach for a more complex method, without providing the necessary preconditions, are worse off than if they had selected a more simple method. This is why it is so important to understand the differences in the probability of success between the different methods. It is also important to know how easy or difficult the particular software application is to configure and maintain and relating this back to an honest appraisal of how effective the company has been in the past in implementing complex systems before making a software selection decision.

References

 

Supply Planning Book

SUPPLY

Supply Planning with MRP, DRP and APS Software

Showing the Pathway for Improvement

Supply planning software, and by extension supply planning itself, could be used much more efficiently than it currently is. Why aren’t things better?

Providing an Overall Understanding of Supply Planning in Software

Unlike most books about software, this book showcases more than one vendor. Focusing an entire book on a single software application is beneficial for those that want to use the application in question solely. However, this book is designed for people that want to understand supply planning in systems.

  • What methods fall into APS?
  • How do the different methods work and how do they differ in how they generate output?
  • What is the sequence of supply planning runs?

These types of questions are answered for readers in this book.

This book explains the primary methods that are used for supply planning, the supply planning parameters that control the planning output as well as how they relate to one another.

Who is This Book For?

This book as a practical primer for anyone looking to perform a supply planning software selection, any person beginning a supply planning project, or anyone who just wants to understand supply planning software simply better.

Chapters

  • Chapter 1: Introduction
  • Chapter 2: Where Supply Planning Fits Within the Supply Chain Planning Footprint
  • Chapter 3: MRP Explained
  • Chapter 4: DRP Explained
  • Chapter 5: APS Supply Planning Methods
  • Chapter 6: APS for Deployment
  • Chapter 7: Constraint-based Planning
  • Chapter 8: Reorder Point Planning
  • Chapter 9: Planning Parameters
  • Chapter 10: How MRP, DRP, and APS Relate to One Another
  • Chapter 11: Supply Planning Visibility and Master Data Management
  • Chapter 12: Understanding the Difference Between Production Versus Simulation