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Why Do You Need Safety Stock?

In this article, we explore the concept of safety stock.  What is it, and why do you need it?

In a later article, we will discuss how to calculate the optimal safety stock level for your operation.

What is Safety Stock?

Safety Stock is planned inventory meant to protect your operation's performance metrics from variability.  You can set safety stock levels almost anywhere in your operation, but some of the most common locations might be on the raw material side at the input to your production operation and on the finished good side at the exit to your production operation.

Raw Material Safety Stock

Placing a preset raw material level before your production operation can guard against variability in your raw material supply.  If you have a supplier that has quality issues and you are constantly having to reject their product, you might place a level of safety stock of those materials in your operation.

Your supplier may also have limitations on the production capacity that they allocate to you, in which case a different level of safety stock could accommodate that issue.

You might also have variability in the on-time arrival of your raw material due to late shipment from the supplier, material arriving from another country and potentially being held at the border, because the delivery driver had to take his or her DOT-required break, or a litany of other reasons.

Having no safety stock of that raw material could mean that you have no material to manufacture into your product, which could cause downtime in your operation.  This is not only expensive when it occurs, but it is also expensive later, too.  You might then have to schedule expensive overtime work for your manufacturing operation, once the material arrives, to avoid placing delivery to your customer into jeopardy.

You may still have enough of another product to manufacture, but you could be left with too much of that product, which could fall victim to obsolescence if your customer changes the long-term order or scrap if your products have a limited shelf life and the product cannot be sold prior to the expiration of the shelf life.

Finished Goods Safety Stock

Placing a finished goods safety stock level at the exit of your production operation can guard against a few different types of variability.

First, it can guard against variability in your production operation.  If your scrap rates are not consistent, then a spike in scrap rates could mean that you do not have enough product to deliver on-time to the customer.

Second, it can guard against variability in your customers' demand.  If their order doubles within your production lead time and your contracts with them do not protect you against this type of behavior, then safety stock can help to ensure that you can still deliver on time to the customer.

Other Types of Safety Stock

You can also place a safety stock level in your WIP (work in process).  Especially if you have a multi-step operation with different scrap rates and production speeds, placing WIP safety stock levels can help to ensure that your production operation is as well-utilized as possible.

Often, you might place a level of safety stock at the entrance to the bottleneck operation.  This is the step in the process through which material flows the slowest.  By strategically placing inventory at this point, you ensure that your bottleneck operation is utilized to its maximum potential, which can help to smooth the flow of material through the entire operation.

Other Considerations

Safety stock can help to protect you against a wide variety of supply chain risks, but setting safety stock levels can be risky, too.  Ballooning inventory could be a sign of an operation in a downward spiral.  If you find yourself calculating progressively higher and higher levels of safety stock, then you most likely have other issues that need to be addressed, too. . . immediately.

For example, we discussed carrying finished good safety stock to protect against variability in your customers' demand.  But, if your production lead time is several weeks and your customer can double or triple their order within a few days, then this should be addressed in your contract with them, if possible.  Having a firm demand period is vital to ensuring that you don't have to carry significant inventory levels to support your customers' variability in their own production operation.

If a fixed demand period is not able to be addressed in the contract with your customer, then you must carry inventory to support the demand, but you should also ensure that your product is priced accordingly, taking into account the increased inventory carrying cost and the potential risk of obsolescence and/or scrap.

Concluding Thoughts

Safety stock is never meant to mask other problems in your supply chain, but inventory can most definitely do that without you noticing.  Safety stock is meant to do just what the name implies:  to provide a safety net against unexpected variability in the supply chain.

Determining the optimal level of safety stock for each of your raw materials and finished goods is both an art and a science.  Titanium Consulting, LLC specializes in end-to-end supply chain analysis and process improvement.  If you would like to find out what the optimal level of safety stock is for your organization, then contact Titanium Consulting, LLC to conduct an analysis and calculate that optimal level for you.

Brad Couvillon, CPIM, CSCP

Lean Six Sigma Black Belt

Founder, Titanium Consulting, LLC