We always enjoy passing along advice from the folks at APICS. In our long history with them we’ve found that no one knows more about supply chain, inventory control and production than their various contributors, editors and subject matter experts. This post we’ll review what Dave Turbide, CFPIM, consultant and President of the New Hampshire APICS Chapter, had to say in the Jan/Feb 2014 issue of APICS Magazine, in an article entitled ‘For Emergency Use Only.’
Turbide makes the point that too often companies use safety stock as a “set it and forget” catch-all bucket to compensate for any and all inventory planning and execution errors. He reminds us that, per the APICS Dictionary, the real purpose of safety stock is to “protect against fluctuations in demand or supply or, in scheduling, to protect against forecast errors and short-term changes in the backlog.”
We’ve never seen a company that doesn’t employ safety stock. But its purpose can be distorted, and it should not be your default method for compensating for any and all possible causes of shortage. It is not intended to protect against causes like inventory loss, damage and pilferage; nor against scrap or losses in production; nor for late receipts from a vendor.
Turbide points out that there are other ways to reflect these risks in planning, such as shrinkage factors, adjusted BOM quantities, yield factors and safety lead times to name a few.
While each of these methods generate additional inventory, they do so in ways more appropriate to their situations. And because they do, you have a better shot at actually identifying your causes of inventory discrepancy; you can measure risks against losses; and you can avoid ending up with more inventory than you need, or less than you expect.
You can find previous issues of APICS Magazine online, here:
Thus, when you’re looking to trim down inventory, safety stock is one of the first places you should look. Properly managed, excess inventory can be managed without increasing the risk of out-of-stock situations. But when you use safety stock as the sole compensating factor for all shortage risks, you lose visibility and along with it real meaning.
Better, says Turbide, to “identify the level of risk for each potential shortage factor, set the proper controls in your planning system, and institute a program of period review of each factor to make sure it’s still appropriate for current conditions.”
After that, your continuous improvement efforts can focus on eliminating extra inventory through lessening variability, reducing scrap and yield (i.e., process) loss, improving on-time performance (in and out), and increasing inventory record accuracy. That done, you can even revisit safety stock compensating factors and adjust them further, thus further improving (reducing) your inventory. As always, it’s about [wait for it…] continuous improvement.