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How Safety Stock Analysis Can Help Optimize Inventory

Feb 17, 2021

At Quantzig, we often come across scenarios where a product manufacturer developing a customized product for a customer loses the customer due to an inability to meet OTIF service levels or a retailer experiencing a spike in demand for a particular SKU is unable to address customer needs and loses sales due to a lack of safety stock. Do you find yourself in similar situations? Your inability to meet demand can negatively impact CX and brand value, and in both scenarios, businesses face substantial monetary losses and an irreversible impact on the brand image.

 Safety Stock

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In the real world, even the best forecasting methods do not correctly predict demand, and sudden supply chain disruptions can impact business operations. The reasons for demand-supply mismatches can be traced back to several factors, including raw material shortages, supply chain inefficiencies, manufacturing unit breakdowns, demand spikes, and more. To overcome these challenges, businesses must ensure they cost-effectively meet customer needs while also not storing excess inventory – This is where safety stock analysis can help your business.

What is the concept of safety stock?

The shifts in consumer demand due to the pandemic weren’t easy to predict, but the dynamism and the nature of demand spikes during the initial phase of the COVID-19 outbreak set a perfect example of how uncertainty can impact supply chains and business operations globally. This is one of the reasons for the growing concerns on safety stock optimization. Safety stock is a measure of the additional quantity of a product or SKU that is to be maintained at all times to prevent an out-of-stock situation. If you’re looking for detailed insights on our engagement models and pricing policiesRequest a free proposal.

How Quantzig’s approach to safety stock analysis can help businesses

Adopting a mathematical approach to optimizing inventory will justify the required stock levels to business leaders and balance the conflicting goals of boosting customer service and minimizing inventory cost.

Our approach focuses on analyzing three factors that aid safety stock calculation:

  • Desired service level
  • Variation in demand and uncertainty in lead time
  • Seasonality index

1. Desired service level

The desired service level communicates the probability that a specific safety stock level will not lead to inventory stockouts. Naturally, when safety stocks are optimized with inventory optimization solutions, the service levels increase with a zero probability of encountering stockouts.

2. Variation in demand and uncertainty in lead time

To deal with demand variability and lead time uncertainty, we use the Monte-Carlo simulation to understand the impact of risk and uncertainty in demand and lead time.

3. Seasonality index

Including seasonality index in safety stock calculation will help consider the monthly variation or seasonal variation in demand during safety stock calculation.

Request more information to gain detailed insights on inventory optimization and its role in helping businesses thrive amid uncertainties.

The challenge for all supply chain executives is to strike the perfect balance between the stock levels required to maintain the target service levels while keeping as few SKUs as possible and stocking up just the right amount of seasonal stock to make sure they don’t run out of stocks. While a few businesses use gut feel for safety stock estimation, the others base their stock levels on a certain percentage of their cycle stock level. Though these techniques might be easy to execute, the results are generally inaccurate and lead to poor performance. Safety stock optimization solutions are backed by robust analytical approaches that have proven to drive positive results, making it a trustworthy, standard approach to safety stock estimation by industry experts.

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