INVENTORY PLANNING & OPTIMIZATION
Decide Stock Status and
Safety Stock Together
The stock status (stock or no-stock) and the safety stock
decisions a company makes
have profound impact on how
their inventory performs—the
fill it provides and the capital
it requires. In the vast majority
of inventory systems the stock
status decision of each item is
made first and the safety stock
decision second. Additionally,
these decisions are almost
always made on different
bases, with different criteria.
There’s a better way.
—Terry Harris, managing partner,
Chicago Consulting
or example, a stock status decision might be to “stock any item that
was ordered at least three times in the last year.” A safety stock deci-
sion might be “two weeks’ worth.” These decisions are independent
of each other and applied separately—at different times.
As noted, there is a better way. Companies that make these decisions
together and on the same basis will see their inventory perform better – it will
provide higher fill with less capital.
It’s easy to see why. These two decisions have exactly the same effect. Stocking
another item does the same as increasing the safety stock of a stock item—it
increases the fill the inventory provides and the capital it requires. Accordingly,
these decisions should be made together and under the same standards.
Increasing the fill this inventory provides can be done in two general ways and
many specific ways. The stock
status of any item A through D
can be changed to stock, causing
the fill and the capital required of
the whole inventory to increase,
or the safety stock of any item E
through J can be increased. The
effect is the same higher fill and
higher capital. To be sure, the precise numerical fill and capital increases depend
on the specific item, but the directional effect is exactly the same.
More specifically in this situation, a company should consider two options:
1) making any of items A through D a stock item coupled with a safety stock of
zero, and 2) increasing the safety stocks of any item E through J by one. The
next step would be to pick the option that provides the best benefit. To restrict
the consideration to just one of these alternatives degrades inventory performance. To make the comparison of these two options with different criteria also
degrades performance.
Of course, the same principal applies if a company wishes to get cash out of
its inventory and is willing to bear the related fill reduction. Making the stock
status and the safety stock decisions together allows a company to get more
cash out for lower decline in fill.
F
ITEM STOCK STATUS SAFETY STOCK A Non-stock — B Non-stock — C Non-stock — D Non-stock — E Stock 0 F Stock 1 G Stock 5 H Stock 10 I Stock 50 J Stock 100
The Outlook
If you thought there was nothing new under the inventory management “sun”,
it’s time to think again. Making stock status and safety stock decisions together,
and on the same basis, constitutes a simple change that can significantly boost
inventory performance.
