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Thread: Safety Stock in an S&OP process

  1. #1
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    Default Safety Stock in an S&OP process

    Hi,
    Been trying to figure this one out but would appreciate some thoughts.

    Our Demand Planning process involves taking consumer demand at the store level applying days of supply calculation, looking at on hand inventory and adding lead times to come up with the store shipments forecast.
    The shipments forecast is then rolled up and is used in conjunction with sales and financial forecasts to drive the Sales and Operations process where we reach a concensus of what the final forecast projections for the remainder of the year will be.

    The point I'm debating is whether safety stock should be applied on top of the S&OP driven final forecast? The shipment forecast already includes a hedging element based on days of supply, and as such I feel like there may be some double counting involved.
    Any thoughts on what the appropriate process is, would be appreciated.

    Thanks
    Nziv

  2. #2
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    Default Re: Safety Stock in an S&OP process

    Safety stock is the minimum amount of inventory planned to be kept on hand to accommodate unexpected variation in demand or manufacturing!

  3. #3
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    Default Re: Safety Stock in an S&OP process

    If demand and lead time has unexpected variation then should be applied safety stock. Generally forecast is average demand x lead time. If standard deviation of demand is varied for a certain period (within lead time) then also be applied safety stock.

    Thanks


    Emdadul Huq

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    Default Re: Safety Stock in an S&OP process

    Quote Originally Posted by nziv View Post
    Hi,
    Been trying to figure this one out but would appreciate some thoughts.

    Our Demand Planning process involves taking consumer demand at the store level applying days of supply calculation, looking at on hand inventory and adding lead times to come up with the store shipments forecast.
    The shipments forecast is then rolled up and is used in conjunction with sales and financial forecasts to drive the Sales and Operations process where we reach a concensus of what the final forecast projections for the remainder of the year will be.

    The point I'm debating is whether safety stock should be applied on top of the S&OP driven final forecast? The shipment forecast already includes a hedging element based on days of supply, and as such I feel like there may be some double counting involved.
    Any thoughts on what the appropriate process is, would be appreciated.

    Thanks
    Nziv
    Since you're already hedging, you probably would be double counting. The classic way of doing the calculations is to break up your inventory into Cycle Inventory and Safety Stock Inventory. Use some version of EOQ (Economic Order Quantity) for determining order quantities for Cycle Inventory. Then use Safety Stock calculations to create a buffer which accounts for demand and lead time uncertainties. Of course you will end up making some assumptions to arrive at EOQ, so you will still hedge a bit, but if you divide your inventory this way, it should at least clarify your underlying assumptions. Also consider doing this calculations only for your A-class (i.e. high value) inventory items if you have a lot of products.

  5. #5
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    Default Re: Safety Stock in an S&OP process

    Safety stock is a term used by logisticians to describe a level of extra stock that is maintained to mitigate risk of stockouts (shortfall in raw material or packaging) caused by uncertainties in supply and demand.

  6. #6
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    Default Re: Safety Stock in an S&OP process

    Quote Originally Posted by mdaliceo View Post
    Safety stock is a term used by logisticians to describe a level of extra stock that is maintained to mitigate risk of stockouts (shortfall in raw material or packaging) caused by uncertainties in supply and demand.
    This makes a lot of sense, thanks for the explination guys. Though this all is quite understandable and makes sense, i still like how it is explained very easily. Thanks once again.

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