Page 122 - DMGT525_MATERIALS_MANAGEMENT

Unit 8: Inventory Management

13. …………………. level is equal to the average demand over Lead time and review period Notes
plus safety stock.

8.4 Safety Stock/ Buffer Stock

Safety stock is the amount of inventory carried in addition to the average demand to take care of
fluctuations in demand. In other words, it can be defined as the amount of inventory carried in
addition to the expected demand. In a normal distribution, this would be the mean.

Example: If our average monthly demand is 100 units and we expect next month to be
the same, if we carry 120 units, then we have 20 units of safety stock.
Four criteria to determine safety stock suggested by Silver et al. are summarized below:
 Safety stock established through the use of a simple minded approach, “supplies for a
fixed time period and equal safety factor for all items”.
 Safety stock based on minimization of cost (cost per unit short, cost per stock out, etc.).
 Safety stock based on customer service (specified probability of no stock out per
replenishment cycle, specified fraction of demand to be met, etc.).
 Safety stock based on aggregate consideration “allocation of total safety stocks for items
to minimize the expected total cost of stock out per year, etc.”.

Did u know? Regarding calculation of safety stock, we have two approaches – approximate
method and optimal method. Approximate method independently calculates the safety
stock. It is less involved computationally and offers a near optimal solution. Optimal
method is computationally more complex and faced with the problem of data availability.

8.4.1 Optimum Level of Safety Stock

Optimal safety stock is the quantity of safety stock that is expected to minimize the total of the
relevant costs (or the total of stock out cost and safety stock carrying cost).
The following formulae are used for these items:
1. Stock out cost= Risk % x Maximum No. of Stock outs x Stock out cost per occurrence
2. Safety stock carrying cost= Safety stock x Carrying cost per unit

Self Assessment

Fill in the blanks:
14. ……………… is the amount of Inventory carried in addition to the average demand to
take care of fluctuations in demand.

15. Optimal safety stock is the quantity of safety stock that is expected to …………….. the total
of the relevant costs.

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