There are only two decisions inventory managers routinely make—when to re-order and how much to re-order. Yes, there are other important things to do—forecast better, reduce lead-times, write-off dead stock, expedite, de-expedite and so on. But the “when” and “how much” are the only real decisions. Decisions made every day for every item at every location—after all, not re-ordering is making a decision too.

So if you want to be effective you have to tackle these two continuously made decisions. It’s the quickest and simplest way to have an impact.
 

SAFETY STOCKS AND ORDER QUANTITIES

Safety Stocks (along with lead-times) determine the “when” and Order Quantities decide the “how much”. Of these, Safety Stocks are usually more influential, more powerful than Order Quantities. This is because Safety Stocks are “there all the time” while Order Quantities “come and go.”

In fact, for inventories subject to random demand, Safety Stocks are from 60 to 90% of the average inventory while Order Quantities decide the balance—from 10 to 40%. If Safety Stocks and Order Quantities were both 2 weeks worth (or X weeks worth, for that matter), there would be a two-to-one relationship between them. Safety Stocks would have twice the influence of Order Quantities.

In addition Order Quantities depend on procurement economics—a day’s production, a truckload, a pallet’s worth, a case; enough to get free freight, an EOQ and so on. As such, Order Quantities are relatively inflexible—you can’t change them easily without impacting procurement costs.

But re-setting Safety Stocks is easy. The Safety Stock of item XYZ at location ABC is a number in a computer file. You can change it to anything you wish at any time you wish and all your other processes (POs, receiving and so on) will work just fine. What such a change will do is alter your inventory’s performance — the Cost it requires and the Fill it provides.

Safety Stocks are the most effective decision-making lever inventory planners have…by far.