Reducing Safety Stock
Safety stock is used as a buffer to protect organization from stockouts caused by inaccurate planning or poor schedule adherence by suppliers. As such, its cost (in both material and management) is often seen as a drain on financial resources that results in reduction initiatives. In addition, time sensitive goods such as food, drink, and other perishable items could spoil and go to waste if held as safety stock for too long. Various methods exist to reduce safety stock, these include better use of technology, increased collaboration with suppliers, and more accurate forecasting In a lean supply environment, lead times are reduced, which can help minimize safety stock levels thus reducing the likelihood and impact of stockouts. Due to the cost of safety stock, many organizations opt for a service level led safety stock calculation; for example, a 95% service level could result in stockouts, but is at a level that is satisfactory to the company. The lower the service level, the lower the requirement for safety stock.
An Enterprise Resource Planning system (ERP system) can also help an organization reduce its level of safety stock. Most ERP systems provide a type of Production Planning module. An ERP module such as this can help a company develop highly accurate and dynamic sales forecasts and sales and operations plans. By creating more accurate and dynamic forecasts, a company reduces their chance of producing insufficient inventory for a given period and, thus, should be able to reduce the amount of safety stock that they require. In addition, ERP systems use established formulas to help calculate appropriate levels of safety stock based on the previously developed production plans. While an ERP system aids an organization in estimating a reasonable amount of safety stock, the ERP module must be set up to plan requirements effectively.
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