Safety Stock vs. Safety Time
Forecasted demand is always wrong, and not every supplier delivers on time.
I was reminded of these widely accepted truths of inventory planning while working with a prospective Direct Tech customer in Long Island a couple weeks ago. The company's head of logistics was probing the capabilities of our tools, and we got into a 20-minute discussion on safety stock vs. safety time.
To the casual observer, it had to be an extremely geeky conversation, but we'll save that for another time. Nonetheless, safety stock and safety time are important concepts that inventory planners really do need to understand and use.
Safety time protects against supplier delivery delays. Vendor performance can directly affect your own company's service performance. Therefore, it's important for inventory planners to compare each vendor's promised lead time against the actual delivery time.
To maintain your own high service levels, you'll need to add some safety time to the requested delivery date — typically expressed in days or weeks — when a supplier routinely delivers late.
In similar fashion, safety stock protects against forecast error. It can be applied by simply maintaining a flat quantity — e.g., 50 units of extra inventory over and above the expected need — or it can be far more complex, with the optimal safety stock quantity calculated via an algorithm that takes into account your forecast error rate, supplier lead time and desired customer service level.
Whether you use a sophisticated algorithm or the simpler "flat quantity" approach is up to your business. However, the aforementioned truths (augmented by experience and best practices analysis) show the prudence of building in some basic protections for your inventory operations, including the concepts of safety time and safety stock.
Joe is Vice President of Product Solutions at Software Paradigms International (SPI), an award-winning provider of technology solutions, including merchandise planning applications, mobile applications, eCommerce development and hosting and integration services, to retailers for more than 20 years.
Joe is a 34-year veteran of the retail industry with hands-on experience in marketing, merchandising, inventory management and business development at multichannel retail companies including Lands’ End, LifeSketch.com, Nordstrom.com and Duluth Trading Company. At SPI, Joe uses his experience to help customers and prospects understand how to improve sales and profits through applying industry best practices in merchandise planning and inventory management systems and processes.