The following was first published by me as a LinkedIn article.
Tens of millions or hundreds of millions of dollars or more, in addition to stock prices or market valuation, are at stake depending on the company’s inventory sizes. C-level executives want answers to the following critical questions which are both sides of the same coin.
- How to spend a fixed budget on safety stocks so that the average demand satisfaction for the whole inventory is the highest?
- How to achieve the desired average demand satisfaction for the whole inventory with the lowest budget of total safety stocks?
Figure 1. Common Approach - Setting the Same DS to Each Item
However, we can do much better. By setting the DS for each item more intelligently, we can keep the average DS of 91% and reduce the total safety stock by about 16% (Figure 2). Or by assigning a different set of DSs, we can maintain the same total safety stock budget and increase the average DS from 91% to 93% (Figure 3).
Figure 2. How to Keep the Average DS of 91% and Reduce the Total Safety Stock by About 16%?
Figure 3. How to Keep the Same Total Safety Stock Budget and Increase the Average DS From 91% to 93%?Here is a downloadable spreadsheet file that embeds the formula to calculate DS. One simply fills in whatever DS she/he desires for each item. The average DS and total safety stock will be calculated for you.
If you can produce the results as shown in Figures 2 and 3 or better, congratulations! If not, I would invite you to attend my webinar "Holistic Safety Stock Optimization - Putting the Horse Before the Cart" on Thursday, August 12, 2021
Even if you are able to solve the 10-item problem by trial-and-error, in the real world many businesses have far more stock items than 10, I would still encourage you to attend the event.