Safety stock is designed to protect the company against unexpected changes in demand for the products or delays of delivery. This stock is prepared to preserve the ability of entrepreneurs to satisfy the demand for goods while waiting for next delivery. Safety stock increases the existing stocks in the company calculated on the basis of forecasts or average demand and average delivery time.
- s - point of order
- m - stock level based on demand
- B - safety stock
\(s = m+B\)
The values refer to the period (t) between filing and delivery of the order. Safety stock value (B) is derived from the efforts of entrepreneurs of preventing lack of goods and is dependent on the level of service that indicates the likelihood that orders placed by customers at time (t) shall not exceed the level of s.
The main reason for the increase of safety stock are:
- increase in the cost of lack of supply.
- increase in uncertainty about the level of demand.
- increase in the risk of delays.
The main arguments for the safety stock reduction are: high cost of stock maintenance, stable demand, good suppliers (very high punctuality of deliveries, good communication).
Time/Stock purchase policy
Time/Stock purchase policy (T, S Policy) - is a component of delivery planning. T - means the time unit, and S is a rational upper stock level. In the management plans of demand needs to be aligned with the plans of deliveries. Main objective in coordination is to prevent a lack of raw material. On the other hand, there can be too much of raw material.
The basic intention of the policy is determination of a pattern, which will be the basis for determining the parameters of the contract. Basically, two elements should be determined:
- size of orders
- time whet they should be submitted
The required parameters are mutually dependent. It must be noted that as a basis for planning managers need to take:
- The size of the order, and then the terms of storage are of secondary importance
- Deadlines for ordering, and adjusted size of orders
Assuming that in the planning manager will be guided by the terms of contracts, key parameter is time, which should be enough for delivery. The standard approach will therefore have considered supplies which will be result of orders placed at an interval of T units of time. Over time, however, T must be linked to a quantitative parameter, which is the size of the order and thus delivery that can satisfy demand for a given period.
It is understood that this role may be fulfilled by: rational upper level of the store (S), its value is based on the physical storage capacity. But determining the level of S for raw materials, managers also have to take into account that in the same store, we must also keep other raw materials.
- Graves, S. C., & Willems, S. P. (2000). Optimizing strategic safety stock placement in supply chains. Manufacturing & Service Operations Management, 2(1), 68-83.
- Ellinger, A. E. (2000). Improving marketing/logistics cross-functional collaboration in the supply chain. Industrial marketing management, 29(1), 85-96.