Inventory Management: Safety Stock Calculation and Control

Explore how safety stock balances inventory costs and stock-out risks across raw materials, work in progress, finished goods, and spares, and examine consequences like lost sales, delays, and customer dissatisfaction.

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Explore how holding costs and financial opportunity costs shape safety stock decisions, detailing storage, deterioration, obsolescence, and the impact on cash flow and liquidity.

Explore basic inventory dynamics and how changes in inventory over time appear on a graph, from a basic sawtooth toward more detail as calculations approach.

Observe the sawtooth inventory pattern, where inventory declines under constant demand until replenishment arrives. Highlight reorder points, order quantity Q, and lead times, noting zero safety stock in this example.

Understand reorder point concepts and alternatives in inventory management, comparing continuous review with fixed quantity versus fixed time ordering, and the use of forecasted demand and automation.

Explore how order quantity affects average inventory and order frequency on the inventory dynamics graph, comparing large, infrequent orders to smaller, frequent ones and highlighting trade-offs with safety stock.

The lecture explains safety stock within inventory dynamics amid variable demand and lead time, and how average inventory equals safety stock plus half the order quantity to mitigate stockouts.

Explore three safety stock calculation methods, from simple days-of-demand to the HiHi-AvAv approach, and finally service level with statistical distributions. Use simple methods as checks to validate results.

Learn the simple inventory control method 'days of safety,' using typical daily demand and safety days to cover deliveries, with the formula safety stock equals daily demand multiplied by days.

Compute typical daily demand from weekly usage and multiply by safety days to determine safety stock; example shows 4 bags per day for 3 days equals 12 bags of flour.

Use the HiHi-AvAv method to calculate safety stock against the worst case: high demand times higher replenishment lead time minus average demand times average replenishment lead time.

Calculate safety stock by multiplying high demand rate with high replenishment lead time to set the reorder point, then subtract average lead time demand to protect against worst-case stockouts.

Apply the hi-hi av-av safety stock method to a mattress store scenario to calculate 30 mattresses as safety stock, highlighting how lead time and demand affect stock levels.

Apply the HiHi-AvAv method to calculate safety stock and reorder points from high demand, high lead time, and average lead time demand data.

Adjust safety stock calculations by using a realistic high demand rate and longer lead times, reducing safety stock from 330 to 182 points and saving inventory.

Explore the hi-hi-av-av method for safety stock calculation by estimating average and maximum lead time demand to set reorder points, while noting its simplicity and the need for statistical modeling.

Our third method rigorously calculates safety stock using service level and statistical distributions to provide objective, usable answers across teams and locations.

Define terms and apply the statistical method to determine safety stock using service level, normal distributions, and cumulative probability of lead time and demand rate via mean and standard deviation.

Present method 3: service levels and statistical variation to quantify demand and lead-time uncertainty, enabling tight safety stock control and protection against stockouts.

We model lead time demand with a normal distribution, also known as a Gaussian or bell curve, characterized by its mean and standard deviation.

Define the service level as the percentage of reorder events with sufficient stock during lead time, equal to the probability that lead time demand stays below the reorder point.

Explore the statistical method for safety stock calculation by selecting a service level and balancing safety stock with risk, using lead time demand and its standard deviation.

Explore how to set safety stock using service level and lead time demand variation, modeled by a normal distribution. Learn to calculate standard deviations above the mean to reduce stockouts.

Refresh your probability knowledge with a practical recap of probability and normal distributions, understand enough to use this useful area of maths for inventory management decisions.

Explore the normal distribution and its bell curve shape, explain the mean value and rare extremes, and apply this model to lead time demand for safety stock calculation.

Explore normal distributions and standard deviation with bell curves. Compare curves with the same mean but different variation, and learn area under the curve rules for 68%, 95.5%, and 99.7%.

Represent lead time demand as a normal distribution with a mean and variation, and show zero safety stock with the mean reorder point yields a 50 percent stockout risk.

Represent service level on the bell curve by setting reorder points above average lead time demand, achieving 90 percent service level with safety stock equal to z times sigma.

Set service level, compute z from lead time demand, multiply by its standard deviation to obtain safety stock, and add it to average lead time demand to set reorder point.

Calculate safety stock using z-scores from service level targets, illustrated with 50% and 90% levels, and tie safety stock to mean lead time demand, its standard deviation, and reorder points.

Calculate safety stock and reorder point for a 95% service level using lead-time demand statistics; derive z=1.64, safety stock ≈ 33 units, reorder point ≈ 133 units, and explore adjustments.

Calculate safety stock and reorder point for toilet stock at a 99.9% service level by turning the service level into a decimal (0.999) and using a z-score of 3.09. Multiply 3.09 by the standard deviation of lead time demand (200 units) to get about 618 units of safety stock, and add it to the average lead time demand (2,000 units) to yield a reorder point around 2,618 units.

Learn how to compute reorder points with the alternative Excel formula norm.inv, using service level, mean lead time demand, and lead time demand standard deviation to determine safety stock.

Compute your current service level from safety stock and the standard deviation of lead time demand using Z and Excel's norm dist functions.

Learn how to obtain the mean and standard deviation of lead times and demand rates, and prepare data in the right format to use Excel formula for safety stock calculations.

Learn to compute the mean and standard deviation from historical lead time demand data to set safety stock levels, using Excel formulas and simple data visualization.

Evaluate the assumptions behind method three safety stock calculations, including independence and normal distributions of demand and lead time, and assess when data skew or changes affect validity.

Explore how to handle different input data for safety stock calculation, including demand data, lead time data, and data with or without variation.

Calculate safety stock for fixed lead time using the demand rate and its standard deviation; apply the lead time demand standard deviation as sqrt(fixed lead time times demand rate).

The example calculates average lead time demand (560), standard deviation of lead time demand (132), safety stock (308), and reorder point (868) for a 99% service level.

Learn to compute the average lead time demand and its standard deviation under variable lead time and demand, using new formulas, with a tractor dealership example.

Calculate the average lead time demand as 24 tractors and the standard deviation as 7.3, then use Excel's Z (NORM.S.INV) to set safety stock and a reorder point of 30.

Analyze rounding safety stock from six point one to six or seven and its impact on service level and holding costs, including potential $60k annual cost.

Explore method three for safety stock: compute average lead time demand and its standard deviation, and apply norm.inv to obtain z for constant, fixed, and variable lead time and demand.

Select a service level by weighing the probability of stockouts against safety stock costs. Apply marginal analysis to balance marginal costs and benefits in choosing an appropriate service level.

Define the service level as the percentage of reordering events with lead time demand less than or equal to the reorder point. Thus, it equals one minus the stockout probability.

Evaluate factors shaping safe stock levels, balancing service level, stockout risk, profitability, inventory costs, safety criticality, salvage value, and ease of expediting.

Use marginal analysis to estimate your service level by comparing marginal benefits (price minus cost) to marginal costs (cost minus salvage value), guiding safety stock decisions.

Apply marginal analysis to inventory management by comparing price, cost, and salvage value to compute marginal benefit, marginal cost, and a 67 percent service level.