Quantitative Analysis for Management-Inventory Control - Essay Example

There are three techniques used to calculate safety stocks;

1. Statistical based,
2. Fixed quantity, and
3. Time period based. (Martin Murray)

Statistical-Based Safety Stock:

This method is based on the principle that the safety stock can be mathematically calculated to prevent a stock-out situation. Traditionally, the normal distribution or the bell-shaped curve is used to calculate the safety stock statistically, where the mid-point of the curve is the forecast, which represents the average value. When the curve moves away from the center, this represents the deviation from the average and the probability of a high deviation from the forecast is represented by a smaller and smaller percentage.

There are pros and cons to selecting a statistical-based safety stock. Although this method is based on mathematics predictions cannot always be accurate and there are always situations that occur that cannot be forecasted. (Inventory Management)

Fixed Safety Stock:

The companies can also decide to have a fixed value of their safety stock at all times. To determine a fixed level of safety stock a production/stock planner will be required instead of relying on mathematical calculations. The value thus determined by the planner will remain the same unless manually changed. The replenishment order for a material will be initiated as soon as the value of the stock reaches or falls below the fixed safety stock value and the quantity of the order is determined by the demand.

Period-Based Safety Stock:

This method is used to determine the stock level required over a fixed period. For example, if production requires 1000 units of material daily, this means that the safety stock for a week would be 7000 units. Therefore, the period-based safety stock is determined by forecasting the demand for the stock in the future. This forecast will be a combination of actual demand and a forecast based on statistical calculations.

There are two common conventional methods for calculating the safety stock quantity for a product:

1. Percentage of Lead Time Demand
2. Days Supply

Percentage of Lead Time Demand

In this method, we multiply the demand per day by the projected lead time resulting in a lead time demand. Safety stock is half this amount. This quantity represents an x-day reserve.

Days Supply

This method allows the buyer to specify how many days' supply of a product should be held in reserve for safety stock. (Inventory Control Man)