How many times has there been a debate at your company asking the question, “Is safety stock a good ‘bet’ to satisfy customers?”
Everyone knows that inventory costs money. And too much inventory is not a good financial decision. So, is safety stock really needed? If so, is there a ‘middle ground?’
Changing Customer Demographics
In today’s world, with quality and ‘fitness of purpose’ a given, consumers are focusing their expectations on product availability and delivery.
Furthermore, companies now more than ever have local and/or international competition.
That said, today the ‘order winner’ is a company that has the product (or something very similar to what the customer wants) in-stock.
What, then, is safety stock and how is it supposed to help?
Safety Stock Defined
In an imperfect world companies must plan to serve customers even though there are challenges to manufacturing or conveyance to the market place.
Therefore, ‘safety stock’ is a level of inventory (or buffer) planned to protect the company against fluctuations expected during the ‘supply and demand’ cycle.
This means preparing for something the company couldn’t visualize or hadn’t planned on occurring.
One such problem could be an unexpected ‘pent-up’ demand for the company’s products. Likewise, it could be customs holding an inbound shipment for two weeks, a transportation delay due to severe flooding in the south, or snow storms and plant closures in the northeast.
What Factors Determine the Amount of Safety Stock Needed?
There are several factors affecting ‘how much’ safety stock is enough, be it raw materials or finished goods.
The major factors include forecasting, gauging ‘demand during lead time,’ and what ‘level of customer service’ agreed to by executive management, sales and marketing.
Today, customer satisfaction is of paramount importance. Competition is fierce. Sales success means having what the customer wants and providing it when they want it.
And that’s where safety stock comes in, i.e., what fluctuations can you plan for in the ‘demand and supply’ cycle? It is important to remember that ‘order winners’ … those products available today, not tomorrow.
So, safety stock can be a ‘good bet’ to satisfy customers.
The Bottom Line. Companies have always debated safety stock. Today, most companies have competition. Consumer demographics have changed with product quality and ‘fitness of purpose’ a given. An ‘order winner’ can be determined by having stock. Safety stock is a level of inventory planned to protect the company against fluctuations in the supply and demand cycle. Factors affecting levels of safety stock are demand during lead time and the company’s ‘level of customer service.’ Winning means managing the ‘demand and supply’ curve and meeting the needs of the customer. Order winners can mean having the product available for the customer when they want it. That is, safety stock can be a good bet.
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