So the question is: How do I know what’s my right stock level? We all know our formulas to find re-order point. From there you can go on finding your stock level.
The key parameter in our ROP is ….Yes! Safety Stock. Now, how do you determine safety stock. If you said based on the number days, you’re in serious trouble.
You are in trouble because you’re going against the laws of Mathematics. Let’s get to basics for a minute. Why do we need safety stock? To account for sudden variation in customer demand. How do you measure variation? Ta..da..Standard Deviation. Yep ! standard deviation is what we are talking about. It’s more important than your significant other.
It is amazing how most of us are oblivious to this and go on setting our safety stocks arbitrarily. Here is the rule: If you have your safety stock below what your Standard Deviation requires for a certain service level, stock outs will happen.
These days, I have become a SD evangelist within my company, prodding people to set their stock level based on this. I don’t want this to be a Statistics 101 class and hence, skipping all the details of SD. It is amazing how people even with Master’s degrees forget about this simple thing end up chasing delivery and inventory.
Focus on setting up your stock levels based you SD to hit delivery. Then focus on your set up times to reduce you production lead-time. Recalcuate you stock levels for the new leadtime. You’ll reduce inventory and still hit delivery. Spreadsheet reduction of inventory might seem easy but you will certainly miss on delivery.