What is Safety Stock? Table of Contents What is Safety Stock? Safety stock or buffer stock is the additional quantity of an item above the desired quantity that is held in the on-hand inventory. Such extra inventory is held with the sole purpose of avoiding the risk of running out of stock. Safety stock serves as an insurance or a cushion for manufacturers and retailers against possible out of stock situations for an item. Such stock outs are caused usually by: Changes in the demand for the item Inaccuracies in the forecasts of the item Unforeseen disruption to the supply line of the item Maintaining safety stock for an item comes with its own challenges. The first is the identification of the appropriate method of calculation in arriving at the right quantities that need to be maintained for each item. The second is the increase in the working capital to store additional on-hand quantities. So, the right safety stock for an item should strike a balance between the conflicting goals of maximizing customer experience (satisfaction) and the cost of managing additional inventories. Why to maintain Safety stock? The important reasons to maintain the safety stock is to prevent the business from stock out situations which arise due to various internal and external factors. Some of the major factors are: External Factors: Fluctuation in demand: A spike in consumer demand often results in stock outs. Spikes in consumer demand can be attributed to many reasons including festivals, seasonal and any act of nature (epidemic). Variation in supply line: Any disruption to the supply line by the vendor leads to stock outs. It might be due unforeseen reasons including weather-related shipping delays, and vendor’s production bottlenecks. Internal Factors: Inaccurate Forecasts: Any inaccuracies in the forecasts lead to stock outs. Such inaccuracies might be due to the nature of the product itself, or lack of accurate data and lack of proper tools and techniques. Production delays: Any unexpected delays in the production and transportation in the internal value chain lead to stock outs. It might be due to unexpected breakdowns in the production line and industrial unrest. Variation in consumer demand is the single major reason for the maintenance of safety stocks. Stock outs are undesirable as they adversely affect the business. Some of the major impacts to business are: Loss of Sale: In the highly competitive marketplace, it is quite tough to regain a lost sale, and often declared as the ‘lost opportunity’. Erosion of Market Share: Poor service delivery due to stock out starts with the erosion of customer base and ends with the erosion of market share. Strained Supply chain: Stock out puts additional burden on the supply chain, and it strains the relationship between partners of supply chain. The advantages of maintaining safety stock levels Holding sufficient levels of safety stock reduces the risk to stock out and there by provides the business the following insurance cover: Prevents stock out due to sudden spikes in consumer demands Prevents stock out due to uncertain lead times of vendors and internal production line Prevents stock out due to disruption to the supply line from vendors Prevents stock out due to inaccurate forecast Ensures customer service and satisfaction levels Ensures continued sales and market share Helps to maintain healthy relationship with supply chain partners Helps to automate the reorder points How to employ Safety stock in the supply chain? Though the purpose of maintaining safety stock is to avoid stock outs, it is not intended for all stock outs but for majority of them. While calculating the safety stock levels a right balance should be arrived between the opposing objectives of satisfying customer requirements at a specific service level and the cost of holding additional inventory. Since not all items are same, any general application of safety stock policy has adverse effects. Some organizations often employ the policy of using their rule of thumb to arrive at the safety stock levels in the absence of any modern automation tool or software under their disposal. Such policies often end up with more disturbances to business than the expected improvement. A robust inventory management system supported by a dynamic planning engine is required for business to handle the safety stock level and to process automate item replenishments. A statistical calculation technique is required for business to manage the conflicting goals of maximizing customer experience and the cost of managing the additional inventories. Microsoft Dynamics 365 offers a robust and scalable supply chain solution to manufacturers and retailers with end-to-end supply chain and inventory management processes, including the safety stock management, and seamlessly integrated with the modules of Finance, Purchase and Master Planning for accounting, replenishment and reporting. Solution offered by D365 Finance & Supply Chain (or Operations) Safety stock level fulfills the following purposes: 1. Act as the buffer stock against to prevent stock out scenarios 2. Act as a demand (reorder point) thereby triggering the automatic fulfillment ordersWhile safety stock levels prevent stock outs, it also serves as the reorder point or act as a system generated demand, where automatic replenishment policies can plan for item coverage for a given period. Thus, safety stock offers the process automation and reduces human efforts in managing the desired stock levels. As part of item replenishment policy, safety stocks are configured for items according to their consumption and importance to business. With a clear marking of safety stocks for items, master planning engine takes care of replenishment based on the (Coverage plan) policies attached to the item. Management of safety stocks in D365 F&O requires knowledge about 3 different aspects of safety stock. Configuration required for using safety stock Automatic replenishment policies Recalculation of safety stock levels Configuration and automatic replenishment policies The configuration and automatic replenishment policies for safety stock cover the following: What to plan? Where to plan? When to plan? How to plan? What to plan: The fundamental and one of the important set up for safety stock is the setup of the coverage plan (replenishment … Read more