A New Safety Stock Calculation<\/h3><\/div><\/div><\/div>PurchTips edition #86<\/p>\n<\/div>
How Much Inventory Is Too Much?<\/h4><\/div><\/div><\/div>One of the most embarrassing situations for a supply chain manager is to run out of stock. Especially if it brings certain operations to a halt.<\/p>\n
More inventory guards against stockouts. However, inventory represents costs that executives seek to minimize. You need a balance between high cost and high risk, which involves calculating the safety stock level (SSL) for each key inventory item.<\/p>\n
There is no perfect safety stock calculation applicable to all situations. According to the book “Purchasing and the Management of Materials” by Gary Zenz, “The size of [safety stock] depends on the importance of the particular item to the process, the value of the investment, and the availability of substitutes on short notice.”<\/p>\n
One calculation that I came up with as a benchmark for having too much safety stock is this:<\/p>\n
Maximum SSL = MHDU x (MHLT – ALT)<\/p>\n
Where,<\/p>\n
MHDU = Maximum historical daily usage<\/p>\n
MHLT = Maximum historical lead time<\/p>\n
ALT = Average lead time<\/p>\n
The theory behind this safety stock calculation is that you will have just enough inventory in stock if two “catastrophic” events happen simultaneously:<\/p>\n
\n- Your supplier’s lead time slips to the longest it’s ever been with that supplier; and<\/li>\n
- On those days that your supplier is late, your company uses the most inventory it has ever used.<\/li>\n<\/ul>\n
In most situations, this is probably too much safety stock to have on-hand. However, this calculation is a good measurement for determining if your SSL is set too high.<\/p>\n<\/div><\/div><\/div><\/div><\/div>
Do You Want a More Rewarding Procurement Career?<\/h5><\/div>![](\"https:\/\/www.certitrek.com\/nlpa\/wp-content\/uploads\/sites\/5\/2020\/12\/spsm_verify.jpg\" "\\"spsm_verify\\"")
<\/span><\/div>Are you tired of not getting enough opportunities, respect, and money out of your procurement career? Well, guess what? Nothing will change unless you take action towards becoming a world-class procurement professional.<\/p>\n
Earning your SPSM Certification is the action to take if you want to bring the most modern procurement practices into your organization and achieve your career potential. Download the SPSM Certification Guide today to learn how to get started on your journey to a more rewarding procurement career!<\/p>\n<\/div>
Download<\/span><\/a><\/div><\/div><\/div>Need Better Performance From Your Procurement Team?<\/h5><\/div>![](\"https:\/\/www.certitrek.com\/nlpa\/wp-content\/uploads\/sites\/5\/2020\/12\/services.jpg\" "\\"services\\"")
<\/span><\/div>Are you a procurement leader whose team isn\u2019t achieving the results you know are possible? Maybe it\u2019s not enough cost savings. Or frustrating performance from the supply base. Or dissatisfied internal customers.<\/p>\n
You need a performance improvement plan that\u2019s easy to implement and quick to produce results. The NLPA can help.<\/p>\n
Download our whitepaper \u201cThe Procurement Leader\u2019s Guide To A More Successful Team.\u201d You\u2019ll learn the 7 steps for transforming your staff into a results-producing, world-class procurement team.<\/p>\n<\/div>
PurchTips edition #86<\/p>\n<\/div>
How Much Inventory Is Too Much?<\/h4><\/div><\/div><\/div>One of the most embarrassing situations for a supply chain manager is to run out of stock. Especially if it brings certain operations to a halt.<\/p>\n
More inventory guards against stockouts. However, inventory represents costs that executives seek to minimize. You need a balance between high cost and high risk, which involves calculating the safety stock level (SSL) for each key inventory item.<\/p>\n
There is no perfect safety stock calculation applicable to all situations. According to the book “Purchasing and the Management of Materials” by Gary Zenz, “The size of [safety stock] depends on the importance of the particular item to the process, the value of the investment, and the availability of substitutes on short notice.”<\/p>\n
One calculation that I came up with as a benchmark for having too much safety stock is this:<\/p>\n
Maximum SSL = MHDU x (MHLT – ALT)<\/p>\n
Where,<\/p>\n
MHDU = Maximum historical daily usage<\/p>\n
MHLT = Maximum historical lead time<\/p>\n
ALT = Average lead time<\/p>\n
The theory behind this safety stock calculation is that you will have just enough inventory in stock if two “catastrophic” events happen simultaneously:<\/p>\n
\n- Your supplier’s lead time slips to the longest it’s ever been with that supplier; and<\/li>\n
- On those days that your supplier is late, your company uses the most inventory it has ever used.<\/li>\n<\/ul>\n
In most situations, this is probably too much safety stock to have on-hand. However, this calculation is a good measurement for determining if your SSL is set too high.<\/p>\n<\/div><\/div><\/div><\/div><\/div>
Do You Want a More Rewarding Procurement Career?<\/h5><\/div><\/span><\/div>Are you tired of not getting enough opportunities, respect, and money out of your procurement career? Well, guess what? Nothing will change unless you take action towards becoming a world-class procurement professional.<\/p>\n
Earning your SPSM Certification is the action to take if you want to bring the most modern procurement practices into your organization and achieve your career potential. Download the SPSM Certification Guide today to learn how to get started on your journey to a more rewarding procurement career!<\/p>\n<\/div>
Download<\/span><\/a><\/div><\/div><\/div>Need Better Performance From Your Procurement Team?<\/h5><\/div><\/span><\/div>Are you a procurement leader whose team isn\u2019t achieving the results you know are possible? Maybe it\u2019s not enough cost savings. Or frustrating performance from the supply base. Or dissatisfied internal customers.<\/p>\n
You need a performance improvement plan that\u2019s easy to implement and quick to produce results. The NLPA can help.<\/p>\n
Download our whitepaper \u201cThe Procurement Leader\u2019s Guide To A More Successful Team.\u201d You\u2019ll learn the 7 steps for transforming your staff into a results-producing, world-class procurement team.<\/p>\n<\/div>
One of the most embarrassing situations for a supply chain manager is to run out of stock. Especially if it brings certain operations to a halt.<\/p>\n
More inventory guards against stockouts. However, inventory represents costs that executives seek to minimize. You need a balance between high cost and high risk, which involves calculating the safety stock level (SSL) for each key inventory item.<\/p>\n
There is no perfect safety stock calculation applicable to all situations. According to the book “Purchasing and the Management of Materials” by Gary Zenz, “The size of [safety stock] depends on the importance of the particular item to the process, the value of the investment, and the availability of substitutes on short notice.”<\/p>\n
One calculation that I came up with as a benchmark for having too much safety stock is this:<\/p>\n
Maximum SSL = MHDU x (MHLT – ALT)<\/p>\n
Where,<\/p>\n
MHDU = Maximum historical daily usage<\/p>\n
MHLT = Maximum historical lead time<\/p>\n
ALT = Average lead time<\/p>\n
The theory behind this safety stock calculation is that you will have just enough inventory in stock if two “catastrophic” events happen simultaneously:<\/p>\n
- \n
- Your supplier’s lead time slips to the longest it’s ever been with that supplier; and<\/li>\n
- On those days that your supplier is late, your company uses the most inventory it has ever used.<\/li>\n<\/ul>\n
In most situations, this is probably too much safety stock to have on-hand. However, this calculation is a good measurement for determining if your SSL is set too high.<\/p>\n<\/div><\/div><\/div><\/div><\/div>
Do You Want a More Rewarding Procurement Career?<\/h5><\/div>
<\/span><\/div>Are you tired of not getting enough opportunities, respect, and money out of your procurement career? Well, guess what? Nothing will change unless you take action towards becoming a world-class procurement professional.<\/p>\n
Earning your SPSM Certification is the action to take if you want to bring the most modern procurement practices into your organization and achieve your career potential. Download the SPSM Certification Guide today to learn how to get started on your journey to a more rewarding procurement career!<\/p>\n<\/div>
Download<\/span><\/a><\/div><\/div><\/div>Need Better Performance From Your Procurement Team?<\/h5><\/div>
<\/span><\/div>Are you a procurement leader whose team isn\u2019t achieving the results you know are possible? Maybe it\u2019s not enough cost savings. Or frustrating performance from the supply base. Or dissatisfied internal customers.<\/p>\n
You need a performance improvement plan that\u2019s easy to implement and quick to produce results. The NLPA can help.<\/p>\n
Download our whitepaper \u201cThe Procurement Leader\u2019s Guide To A More Successful Team.\u201d You\u2019ll learn the 7 steps for transforming your staff into a results-producing, world-class procurement team.<\/p>\n<\/div>
![](\"https:\/\/www.certitrek.com\/nlpa\/wp-content\/uploads\/sites\/5\/2020\/12\/services-contracting.jpg\" "\\"services-contracting\\"")
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