D. R. Rice Company

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Safety Stock: Unsafe At Any Level

 By Don Rice

 

Stop! You may be changing your safety stock at the worst possible time. In fact, you may actually be hurting the customer service you're trying to improve! Changing "safety stock" quantities maybe one of the most misunderstood pieces of modern manufacturing systems.

Mismanaged changes to safety stock quantities sometimes cause missed customer order shipments and excess costs - the very things we thought safety stock was going to prevent. Granted, most companies need some type of safety stock. One of the more common reasons is to provide coverage for mismatches between customer orders and forecasts. At its worst, safety stock is a crutch that prevents companies from seeing some of the root causes of customer service problems.

But changes to that safety stock level are typically mismanaged - if managed at all. Let's look at an example.

Good intentions = Bad results

Business has been good for ACME Manufacturing - so good that sales are exceeding forecasts. Figure 1 shows the current Master Schedule for ACME's number one seller, the 2.5 ton hoist. Forecasted sales volume was 40 units per week but for the past two weeks the customer order volume has been 60 units per week. As a result, the current customer orders exceed the forecasted sales plan. Manufacturing is working hard to keep up and match the increase in order rate, but after years of downsizing, right-sizing, streamlining and re-engineering, it doesn't look like they have the people and skills necessary to increase production rates fast enough. On top of that, it's not a safe bet that the suppliers can get the purchased materials here to keep up with the "extra" customer orders. The result? Late shipments and high costs. Sales and marketing is getting worried and have decided that some extra protection is needed for their customers. Everyone knows that safety stock is used to protect customers against stock outs, right?

 

 

Part # :Z432 Desc: 2.5 Ton Hoist OH:130 SS:0 LT:2 Ord. Qty.:120

 

 

Week

 

PD

 

1

 

2

 

3

 

4

 

5

 

6

 

7

 

8

 

9

 

10

 

Forecast

 

 

 

40

 

40

 

40

 

40

 

40

 

40

 

40

 

40

 

40

 

40

 

Available

 

130

 

90

 

50

 

10

 

90

 

50

 

10

 

90

 

50

 

10

 

90

 

MPS

 

 

 

 

 

 

 

 

 

120

 

 

 

 

 

120

 

 

 

 

 

120

 

So, after huddling in a secret executive planning session, the decision is made to mandate an increase in safety stock quantities. After all, ACME's sales are going up, therefore more inventory is needed to support the customers. Someone even has a computer printout telling them how much more safety stock is needed. But, increasing safety stock levels doesn't make the capacity or supplier problems go away. In fact, increasing safety stock now only adds even more pressure to these problems.

Safety Stock: What does it do?

The Master Schedule report in figure 2 shows what happens when the safety stock quantity is increased from 0 (as seen in figure 1) to 100 units (as seen in figure 2).

 

 

Part # :Z432 Desc: 2.5 Ton Hoist OH:130 SS:100 LT:2 Ord. Qty.:120

 

 

Week

 

PD

 

1

 

2

 

3

 

4

 

5

 

6

 

7

 

8

 

9

 

10

 

Forecast

 

 

 

40

 

40

 

40

 

40

 

40

 

40

 

40

 

40

 

40

 

40

 

Available

 

130

 

210

 

170

 

130

 

210

 

170

 

130

 

210

 

170

 

130

 

210

 

MPS

 

 

 

120

 

 

 

 

 

120

 

 

 

 

 

120

 

 

 

 

 

 

After the change to safety stock is made, expedite action messages are created recommending moving all re-supply orders (MPS) up three weeks. To satisfy the forecast and increase safety stock at the same time, the re-supply orders must be finished three weeks earlier than originally planned. This increases total demand (required capacity and material) on

manufacturing resources at the exact time they are suffering from a shortage of resources due to the increased sales rate. Lead times are being crunched, material shortages are increasing and manufacturing gets further behind. Because this increased demand exceeds demonstrated capacity and causes mass confusion on the production floor, every production job is late but some are now really HOT. Manufacturing has started a daily hot list meeting to find out what is really needed and when.

What went wrong with this approach? Let's look at the Master Schedule in figure 1 again. In periods 4,7, and 10 we have resupply orders of 120 units each scheduled to be finished and available for sale. The 120 units are set by the order quantity. The key is changing the safety stock quantity doesn't affect the quantity produced, it changes the timing of resupply. Increasing safety stock tells production they must finish work sooner and, admittedly it's uncommon, decreasing safety stock tells production to finish work later. The order quantity or lot size dictates how much you will get and safety stock affects when it should be finished.

Now the manufacturing people that were struggling to produce enough for shipping the increased customers' orders must also cut the lead time in half for the next 3 or more MPS orders. Did things just get better? Of course not, and in most companies things just got a lot worse. No longer can manufacturing rely on the Master Schedule to establish priorities, due dates and quantities. This is where a lot of companies would throw in the towel and revert to the informal methods of hot lists, daily late order meeting, and material shortage meetings.

Paradigm Shift

The paradigm shift for changing safety stock quantities is that the most effective time to increase safety stock is when you can make more than you can sell, not the reverse - although in a lot of companies the exact opposite is the most common practice. The second paradigm shift is that safety stock can be a barrier or shield to root cause problems in the business. It is not uncommon to see companies spend hundreds of hours and thousands of dollars debating, calculating, updating and expediting production departments and suppliers to increase safety stock but put little or no effort in reducing forecast variability. Many companies have found that investing in improving forecasting and sales planning activities has a better and more permanent payback than playing the safety stock game.

Key Points

Some of the key points to keep in mind when changing safety stock levels are:

  1. Changing safety stock quantities affects the timing of re-supply

  2. Reduce the level of safety stock when supply can't keep up with increases in the customer order rate so that production is using its scarce resources to ship customer orders;

  3. Only increase the level of safety stock when supply can't be reduced as fast as the customer order rate drops;

  4. Increasing safety stock quantities at the wrong time may reduce customer service;

  5. Safety stock must not be the crutch that prevents improvements in the forecasting and sales planning process.


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D. R. Rice Company

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