Managing the supply chain is not an easy process. There are all kinds of inherent risks to ensuring that the supply chain flows and is not interrupted. So keeping a L:ean supply chain, where stock levels are kept very low, can often be seen as a real challenge.
But there is a way of determining safety stock levels with relative ease and that is by using service levels to make this determination! All you need to do is to quantify what levels of service you want to offer your customers and then ensure, through analysis, that you retain enough stock to achieve this level of service.
Safety Stock
Safety stock can sometimes be referred to as ‘buffer’ stock, simply because it is the extra stock that will be kept to act as a buffer against a stock out occurring. If a company retains an extra level of stock then it can meet changes in demand without too many problems. It is in a sense an insurance policy that offers protection from a customer suddenly increasing demand and the supplier having no stock to supply.
The level of safety stock is difficult to accurately predict. The whole thinking behind Lean is to ensure that stock levels are kept low and that there is no waste incurred through keeping too much stock. But if the supplier is meeting the needs of a customer who has a new product that theya re manufacturing, how can anyone know how much stock to keep as safety stock? Well that is where service levels can come into play.
Service Levels
A service level is a tool that is used within stock management systems and supply chain management to assess the performance of the supply chain and stock systems. The service level is used to express the chances of certain levels of safety stock not leading to a stock-out. So when the safety stock is kept quite high, then the chances of a stock-out will be low. Conversely when there is a very low level of safety stock, then the risk of the stock out is high.
So the company needs to decide what is an acceptable service level; it would be foolhardy to set a service level of 100%, since this is too high, but within certain industries, the service level is set at 95%, allowing the opportunity for a stock out, but keeping the risk of this low.
Sometimes setting the customer service level can be an uncomfortable experience, similar to being between a rock and a very hard place. If you do set the customer service level at 95% you are effectively saying that for 5% of the time, the customer’s needs may not be met.
Conversely if you strive for 100% then you will find that there is stock sitting in a warehouse, needing to be managed, controlled, kept secure etc and sometimes it is never used at all; so you lose out as the stock deteriorates, but the customer is kept very happy!
Fixed Time Safety Stock
Historically most businesses have used methods relating to fixed time schedules to ascertain how much safety stock they should keep. So they may retain 4 weeks of safety stock at any given point. When the stock levels get below 4 weeks, stock is replenished. However, this approach is not related in any way to service levels and as a result cannot be as flexible as using service levels to determine safety stock. In addition there is a real danger of stockpiling stock using this method, which in itself can increase costs.
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2 Responses to “Why Service Levels Lead The Way In Determining Safety Stock”
[…] but back in the real world how that can be achieved is not yet known. So you need to set a service level you can live with. Some companies aim for 85% or 90% […]
if we use safety stock to determine service level, do we need to consider sales forecast quarterly or by season?