Calculating Safety Stock: Protecting Against Stock Outs

The following video explains how to calculate safety stock in order to avoid the high costs of inventory shortages and stock-outs. The video explains inventory replenishment times, daily consumption, safety stock thresholds and levels, and your company’s own time to market in terms of delivery.
A graph is provided that clearly shows what the reorder point should be and what the safety stock levels should be.
A working example is provided where a company tracks a number of inventory replenishment times, their own daily consumption levels, the safety stock amount they need to cover during these consumption periods and then finally, your company’s delivery times for finished goods to your customer base.
www.driveyoursu... Video provides four steps to calculate safety stock
Additional Sources: www.driveyoursu... This article outlines four steps to safety stock management

[@ProSimples]

I used this approach of inventory management in my last project using my SP e cp and fortunately I got 100% in my final grade for it. Thank you very much.

[@Driveyoursuccess]

Here are a few things. 1) Apply an minimum order quantity to your own customers and focus on locating additional customers. 2) Focus on vendor acquisition to offset the delay and issue of lot size. Multiple vendors helps to reduce these costs and dangers. 3) Ask the vendor to break the lot size. They will charge more, but you can avoid carrying costs. 4) Sit down with procurement & sales to explain the costs of carrying safety stock. You need multiple sales to make it work.

[@Driveyoursuccess]

Yes, I have a video that shows how to measure holding costs of inventory versus making larger volume purchases. I can't provide a link, but if you go to my channel, you'll see the following: "Inventory Carrying Costs Versus Higher Volume Purchases" - or you can do a search on the video on KZbin.

[@akowalski96]

Thank you for your great video!! I watched this video for my operations management class and I really appreciate how well you explained these concepts and equations.

[@VIJAYAKUMAR-zm9uz]

THANK YOU .....MR.LAN JOHNSON . I UNDERSTAND VERY QUICKLY AND EASILY

[@Driveyoursuccess]

+VIJAYA KUMAR You're welcome. Let me know if you are interested in any other topics.

[@Driveyoursuccess]

Yes and no. Unplanned production outages, by definition, can't be tracked. Scheduled maintenance - yes. Tracking historical delivery accuracy is essential and your vendor should inform you well in advance of any planned shutdown. However, having multiple vendors ensures these issues aren't as severe. Therefore, there might be times where you have to carry more inventory to account for a planned shutdown. But, if you have other vendors, then you can mitigate that extra inventory.

[@remiokeshola2540]

Great Stuff. I've used this in one of my blogs and acknowledged you in it as well.

[@Driveyoursuccess]

Thanks a bunch. Take care

[@lexdsly]

Really helped me get my stock room down up in inventory turns, down in inventory. Thanks so much very helpful!!!

[@KaushikChoudhury]

I am talking about EOQ to customer . I feel to meet the last statement in your comment is very challenging task for organizations. One side there is service delievery and on other side financial impact of carrying high inventory.

[@msz8322]

I think you are mixing up the safety stock and the reorder point. Safety stock is supposed to be the extra buffer you have in order to help to meet the fluctuations in demand

[@kishorkumar1288]

Yes, you are correct. Safety stock is something different from reorder point. Its an additional storage to cover the extra demand. Were reorder level is a point that defines when to place a next order. To calculate safety stock there is an another formulae.

[@explorerali1954]

The sales you took represents total sales of the store while i wants to calculate the buffer stock for all the products seperately as i have the data for the sales for each of them

[@soethuraaung9930]

Very Valuable theory. I want find like that. Thank you so much.

[@lookforbriansjazz7832]

Is Replenishment Time the same as Vendor Lead Time?

[@sayangchen9924]

Thanks very much for made this video. even after 7 years. the knowledge still good for me to understand and management inventory level in a better view.

[@Driveyoursuccess]

Glad it helped!

[@edutechguruengineeringlear4280]

kzbin.info/www/bejne/hXepfWyCpp1prc0

[@mesalonmty]

excellent video Ian, thanks a lot for sharing! greetings from Monterrey, Mexico.

[@Driveyoursuccess]

Mesalon andspa Thank you Mesalon. Take care

[@layoflakersnation]

You fucking rule. I have a test next week that I am absolutely stressing over, but your videos are helping.

[@unmeshchandak4721]

Thanks for the information.Really great and easy way to do it. I have query, this min-max i suppose should be at finished good, how should we calculate the min-max levels for each process? ( within) also with the info from video Min level was calculated, can you share your insights on Max levels?

[@jamesbock6590]

Thank you for explaining it clearly! I Appreciate it!

[@Driveyoursuccess]

No problem James. Let me know if you want me to cover anything else.

[@matthewkayanan3293]

Very clear and concise presentation

[@berenicediaz7497]

Hello Ian, thank you for the videos, I understood very easy. but I have a question, how do u determine the safety stock when you have more than 200 different items, and where the supply delivery time and the sales are not constant ( some months I sell 50pcs/month and suddenly there is a special project and the sales increase to 350 item just in one day x example)? my supplier some times give me 4wks of delivery lead time of any item but sometimes this lead time may vary. Thank you

[@DeborahFishburn]

So you've multiplied the replenishment time by the number of BUYING days, does this imply that your replenishment process is operational seven days a week, or should you ALSO be limiting that to only the number of active replenishment days (at your end OR the supplier's) per week?

[@ismailnassar4103]

Thanks For excellent explanation. But I think the 1016 should not be called Safety stock. It is the ROP QTY. and you embeded the safety in it.

[@ahmedabdelwahid1172]

Ian Johnson thank you very much 🙏🏽

[@fareltan3827]

Thanks for this infomative lecture video, really appreciate for your clear explanantion, thanks so much!!!

[@funandbun1956]

is the safety stock voloume is included in eoq

[@MsTigerseye77]

Thank you for this short and Sweet explanation. I have been using similar analytics to pull historical data for deriving the SS. What has been tricky is I want to isolate a yearly order curve to give a matching stock pattern so that our SS goes from partial to the full 100% automatically. I don't think my annual trend overlay is catching so well. Any advice on how to push this?

[@Driveyoursuccess]

If a company decides upon its own EOQ to customers, then the process is the same. The company will still have a history of daily sales. The last portion is meant for those companies that have flexibility in their delivery times. If they know it only takes two days transit, then they can give a four day lead time and save on how much inventory they carry.

[@AruSharma04]

Very good video!

[@topsyturvyy4558]

Excellent teacher! Thanks!

[@sarinalee2369]

loved your class! thank you!

[@Driveyoursuccess]

Thank you very much. Let me know if you need anything else Sarina.

[@michaeljenkins4698]

While well presented, this is not safety stock. Mr Johnson is describing the calculation for basic coverage - the average amount of stock calculated as necessary to cover a given exposure window. The term "Safety Stock" is specifically a reference to the ADDITIONAL stock over the basic coverage that you need to have in order to protect against variations in the regular demand. If you look at the example, the "average" weekly demand is 635 units a week (127 * 5 days). Two of the four weeks used in the demand data are above the "average". Using this method, you will likely encounter stock-outs nearly 50% of the time. What really needs to be calculated is the stock in addition to the 1016 in the example that should be ordered to ensure a reasonable fill rate. The fill rate is determined by your business model and how tolerant you can be about stock-outs before your business is impacted. Most businesses I deal with are satisfied with an 80-95% fill rate. This makes a good trade off between keeping excess safety stock and actually running out of inventory.

[@KaushikChoudhury]

I liked the way you explained the difference between delivery and replenishment time. How do you see 'Economic Order Quantity' in this context ?

[@djkatzin]

Hey! just have some questions. What if the delivery time to your customer is not flexible at all and your competitors have a quicker response for their demand?. Is it really lean to talk about just in case inventory? Should we take account of our desired level of service for the SS?. Thank you in advance.

[@Driveyoursuccess]

Hi Mr. Ortega, Sorry for not answering this sooner. I am not sure I understand the question. If your customer isn't flexible on delivery time, then you might add a buffer on top of your safety stock to account for this inability to give you a day or two. In that case, you are meeting a strict delivery requirement - hence, you need more inventory. However, I would caution increasing inventory for just one customer without some kind of agreement in place with them. After all, there is a cost to holding that inventory for customers.

[@darcyg852]

Hey, Ian - just stumbled upon this today - 9 years late. Is there anything you'd change about this philosophy of calculating Safety Stock today, 9 years later?

[@soni1142]

Nice way of teaching

[@Driveyoursuccess]

Hi Kaushik, Are you talking EOQ from vendor or EOQ to customer? If you're saddled with a high EOQ from a vendor that exceeds your comfort zone on holding inventory, then yes, it's difficult. Ideal solution is to have multiple vendors. If you're talking about EOQ to customers, then the same rules apply: Make sure you cover enough inventory to cover your replenishment time.

[@liamoa86]

Hi Ian. super interesting video, I just trying to understand more about logistics, so my question is...how do you determine the coverage percentage? is it related to the number of days that you will take to deliver goods?

[@Driveyoursuccess]

Hi Lia. If you are referring to how much you should cover in inventory for sales so that you avoid stock outs, then yes, it is related to the number of days it takes to deliver goods to your customer and the amount of sales in units you make per day. So, let's assume you sell an average of 200 units a day to your customers. Your replenishment time from your vendors to your location is 5 business days. You could cover 1000 units in inventory (200 units/day X 5 business days). However, carrying that much inventory might be too expensive. A solution might include telling your customer that your delivery time is 3 days - so you "save" three days or 600 units (3 x 200 units). In this case, you don't have to carry as much. However, there are always those unforeseen spikes in demand so it's a catch-22

[@liamoa86]

Ian Johnson thanks a lot, very clear

[@travisedwards7334]

Where’s the link for max inventory?

[@jaikrishna4719]

Awesome explanation

[@rommelisagon7732]

Is this safety stock or re order pt?

[@bryancalaguas]

Hi Ian, where did you get the 1. Replenishment time five rows of 6? Is this for one item only? Thank you

[@ehabalramahy8592]

Thank you Ian for this informative video. I have a question regarding the safety stock. It looks like you set up the safety stock to cover 8 days. That means if we work with JIT we have 8 days until stock out. The actual lead time shows that in 3 cases we had a lead time of more than 8 days. That means we would have 3 times a stock out. How do you account for that?

[@bennyying8903]

This is a perfect question. this safety stock calculation doesn't consider fill rate (customer satisfaction). Actually a more complicated calculation involves calculations on regressions of how likely you can fill all your customer orders (probability). in the video above, because only 5 data records are used, using 8 days safety stock will account for only 40% of fill rate. in that case, you will also need to set your company's objective on the fill rate before you can calculate the safety stock.

[@-ZELTHELD-]

@@bennyying8903 I think the more intelligent question is, how can you have such an inconsistent supplier with -2 to +5 days over? Get a better supplier, or force via contract the supply risks onto his shoulders. Stop calculating, make people/ suppliers accountable.

[@samratsam007]

Wow nice... U r a gud taacher sir... Hats off uh sir

[@mansoorahmad1291]

Great video Sir, In ABC Analysis, I have problem in data that some items having low unit price but too much quantity which result in high percentage individual value and some items with high unit price but low quantity which result in low percentage individual value in overall.I want to clarify if some one know that I arrange this data according to unit price or percentage value ( Largest to smallest)? Can u help me?

[@artyvandelayed]

so cover is basically time to sales stockout + estimated delivery time

[@Driveyoursuccess]

+Art Vandalay Yes. But, please remember, this calculation often assumes the best case scenario. As is so often the case, it's history of purchases that tend to level out the lead times and delays.

[@nadiakhan7881]

+Ian Johnson : Mr. Johnson, I have a unique problem. Almost 80% of the time, our customers order the product at 17 weeks LT. It takes us a total of 16 Weeks LT to make our product from first purchase req of the raw material to delivery to customer. What formula should I be using to calculate Safety Stock for such a situation?

[@kulkarninilay]

Thanks for the video. I calculated the safety stock levels and reorder levels. but the problem i face is the lot size that we procure from vendors is much more in my case and its not practically affordable to order a lot size according to my calculations. Lead time is also more than 30 days. we always end up in having lot more inventory than needed. Is there any way to deal with this issue?

[@kulkarninilay]

Hi Ian, Is there anyway to consider the breakdowns, unplanned production outages at supplier's end while considering the safety stocks?

[@kulkarninilay]

Thanks for the reply. It will help me a lot. Currently I am working on finding more logistics option for procuring the material. But I want to compare that is it more beneficial to carry higher inventory cost just for the logistics benefits or to carry lower inventory and pay higher for logistics. Is there any way to calculate and compare both costs i.e, inventory carrying costs vs logistics costs?

[@dabills4]

Question, I have several items I am looking to figure out the safety stock on. Below is my monthly usage of 4 items in a 9 month period Item A 60,0,148,64,80,184,176,228,136 Total 1076 Item B 607,57,418,9,434,30,109,249,372, Total 2285 Item C 866,188,702,514,1012,518,432,446,748 Total 5426 Item D 926,188,850,578,1092,702,608,674,884 Total 6502 The supplier is an overseas supplier and delivery is on average 12 weeks ARO. How would I go about getting the safety stock/ ROP of each item? Thank you for your time in considering this info.

[@Tibmaninov]

Item A Safety Stock at 170 and reorder point at 410 Item B Safety Stock at 500 and reorder point at 1000 Item C Safety Stock at 610 and reorder point at 1800 Item D Safety Stock at 640 and reorder point at 2080

[@cathyzhang2769]

Thibaut Dehay Can you advise how did you come up with those numbers?

[@arjungrewal8301]

Hi can someone help me with what actual means? when its compared against the shipment. Thanks

[@edutechguruengineeringlear4280]

kzbin.info/www/bejne/hXepfWyCpp1prc0

[@jayzee2620]

When using safety stock, how is the standard deviation of demand during the lead time calculated if the daily demand is normally distributed but the lead time is constant? How is it calculated if daily demand is constant but lead time is normally distributed? How is it calculated if both daily demand and the lead time are normally distributed?

[@bennyying8903]

I think we usually assume sales/demand is normally distributed. while lead time we shall assume constant. again this is in most case because lead time is something you can work with your vendor to improve. then you will need to define what's the fill rate (customer satisfaction) you want to achieve, using that to drive your safety stock is a better way of managing inventory.

[@fyodormihaylovic2556]

This video shows a subjective heuristic method. However if you want to do a scientific optimization you should determine a service level and calculate safety stock which is a buffer for stockouts in addition to order quantity. You might also use a periodic inventory and calculate accordingly. I think in this video the terms safety stock and reorder point is not used most accurately .

[@ferdinandcabansag3443]

Thanks for sharing...

[@yoshuapieterkeren]

Thanks Ian!

[@deepaksingh6120]

Hi Yan , I like the way of calculations. Just one question , this working maily considers fluctuation in lead time but it does not consider fluctuation in demand/consumption. Do you feel is it important to consider fluctuation in consumption ? If yes , how we can do it ?

[@dakspecie89]

Isn't step 2 an average of your daily consumption?

[@jptyiu]

Hi Ian! With these computations, how do you calculate your service level?

[@artyvandelayed]

how is the expected value calculated? or is this more of an estimation

[@uwelex]

Sorry i dont get it, in the step 4, why 75%?

[@jeremymrmg]

Thank you

[@shrenikkhinvasara5713]

HOW TO CALCULATE IF STOCK ORDER QTY IS VERY VOLATILE LIKE 200,250,1000,500,50

[@billscannell3876]

Hello, This video is great. Can I use this same calculation for the remainder of this year? Could I just add the total number of business days remaining and divide it by the demand for the rest of this year?

[@Driveyoursuccess]

Bill Scannell Hi Bill, yes, you can use it for the year. However, there is always an element of the unforeseen within supply chain management - as there is in sales. The calculation becomes more accurate when you employ supply chain predictive analytics in order to predict future disruptions past on historical/past indicators. So, if, for some reason, a vendor or group of vendors is always late between June to August, then you would incorporate that within the calculation.

[@mikocalingasan129]

Well explained. Thanks a lot Sir.

[@Driveyoursuccess]

Thanks for the feedback

[@edutechguruengineeringlear4280]

kzbin.info/www/bejne/hXepfWyCpp1prc0

[@ivanronny01]

wow, thanks for the vid ian

[@Driveyoursuccess]

Thank you.

[@bindiyapillay3482]

Great video,Ian! Thank u.....

[@Driveyoursuccess]

Thank you Bindiya. Take care - Ian

[@baltapasaka]

is it the same as buffer inventory?

[@umma6988]

well delivered. thanks

[@l_t_truth_seeker]

Thank you, it's informative

[@edutechguruengineeringlear4280]

kzbin.info/www/bejne/hXepfWyCpp1prc0

[@avayaniroula7596]

Greetings sir🙏🙏all else equal, a firm that holds safety stock of inventory will have a lower level of average inventory than firm that doesnot. Is it true or false?? Please provide me answer with reason sir🙏🙏Plz reply sir🙏🙏

[@edutechguruengineeringlear4280]

kzbin.info/www/bejne/hXepfWyCpp1prc0

[@edutechguruengineeringlear4280]

False bcz avg inventory with safety stock= Q/2 +B B is added here

[@sudhanshusrivastava9567]

Nice

[@kulkarninilay]

Yeah I just found it. Thanks a lot

[@maketech1]

why 20days ， still not clear.

[@23101990suresh]

good infor sir

[@juanmedrano2638]

excelent!

[@bselect618]

how are you not off 25%?@5:30:?....when it takes 6 days to replenish ???

[@Driveyoursuccess]

Maybe I am - but it's never an exact science and as I mentioned earlier, the more references you have on historical/lagging indicators, the more accurate the variables are within the calculation. Whether or not you keep the exact amount of safety stock is entirely up to you and that largely depends upon the lead time on sales, your own comfort level with holding inventory and your costs to hold that inventory.

[@visualproduction84]

COOL SUPER AWESOME

[@libanahmed6055]

thanks that help a lot

[@AUTOMATIZER]

En este video se explica como planificar la compra de ítems para evitar quedar desabastecidos y también lo contrario, evitar sobreabastecerse, lo cual conlleva costos financieros altos como se explica en el video. kzbin.info/www/bejne/anOaanatfsSZi6s

[@saeedbasabain4188]

Thanks , your email please ?

[@mostafaobadah4463]

good morning Do your courses and send me on emails And thank you

[@daudbhatti1443]

Fucking rip off econplusdal