Default Safety Stock Formula

Task/Problem Overview

The default safety stock formula is fill-rate based, in that it accurately determines the amount of safety stock necessary to fill a pre-determined percentage of orders (e.g., 98.25%), which usually corresponds to a company's customer service level or percentage of on-time deliveries (OTD). Our particular formula accounts for statistical variations in vendor lead time and customer demand, with a specific focus on protecting against daily spikes in demand that lead-time based formulas cannot. Therefore, our formula is much more dynamic than specifying a number for safety stock and determining when to order based on variations in lead time.

Since our formula bases safety stock on the percentage of OTD that should be met, it is up to the individual company to determine their optimal fill rate. A fill rate of 100% will usually result in carrying too much safety stock whereas a fill rate below, say, 95% may result in too many lost sales. So a company will need to determine the greatest fill rate beyond which the cost of filling orders becomes prohibitively expensive (i.e., the minimum cost point). Most companies will use a value within the range of 95-99%.

Please see the following sources for further reading about fill-rate based safety stock calculations:

• http://okulewicz.republika.pl/SafetyStock.htm

• http://business.unr.edu/faculty/ronlembke/463/FillRate.pdf

• http://www.effectiveinventory.com/article29.html

• http://scm.ncsu.edu/scm-articles/article/reorder-point-formulainventory-management-models-a-tutorial (this is part of a larger tutorial)

• http://alexandria.tue.nl/repository/books/632283.pdf

• http://www.inventoryoptimized.com/safety-stock-the-basics/

To configure your default safety stock go to Admin >Administrator > Warehouse tab > Purchasing tab. Here you will enter your Target Fill Rate %.