Safety Stock Calculation 

Purpose

You can use this business process to simultaneously optimize the safety stock and an economic order quantity by using forecast demand information and its standard deviation to determine the amount of safety stock to be kept at each stocking point in the supply chain. This enables you to handle demand and supply uncertainty according to a target service level. Service levels are determined dynamically and differentiated based on demand, demand frequency, product classification, or cost of a product at the given location.

Prerequisites

·        Master data is available in SCM (product master data, bill of distribution (BOD), valid BOD assignment to a product, transportation lanes, supplier relationships).

·        Forecasts for demand, number of order items, demand per order item, and their standard deviation have been created in the Parts Demand Planning process.

Process Flow

This business process runs in SAP SCM:

...

       1.      Calculate safety stock and economic order quantity

In this process step, safety stock and economic order quantity are calculated and jointly optimized. Two basic methods are available for safety stock calculation: Normal distribution and Poisson distribution. The model can be either defined manually or selected automatically. Each model uses slightly different variants depending on whether the forecast is constant or non-constant and – at the entry location level – whether supplier price breaks exist that could be utilized in optimizing overall inventory cost.

This is how safety stock calculation differs according to the kind of demand:

¡        Safety stock calculation for normal distributed demand is based on the demand forecast and the demand standard deviation. A target service level is determined dynamically at run time based on demand, demand frequency, the product classification, and the procurement cost of a product. The target service level is adjusted based on the economic order quantity used to determine the safety stock. The economic order quantity is optimized in this process to guarantee lowest overall inventory cost. The EOQ is subject to rounding rules defined for that product in order to ensure operational efficiency.

¡        Safety stock calculation for Poisson distributed demand is based on the forecast of order items and its standard deviation. The target service level is again determined at run time and adjusted based on the economic order quantity. The reorder point inventory level is determined based on the probability of a stock-out within the reorder period, the frequency and variation of expected order items, and the average demand per order item. The safety stock is then derived from the reorder point and the expected demand over the lead time.

¡        The safety stock of non-constant demand products is determined per period. It can be based on a constant EOQ or on a constant EOQ periods of supply. Price breaks are considered in determining the overall lowest inventory cost by finding also the cost-optimal sourcing quantity.

Lead times for safety stock calculation are determined either from the different lead time components or a fixed composite lead time is used. Lead times can differ depending on whether a location is supplied in a push deployment mode or in a pull deployment mode. Push deployment lead times tend to be shorter as cross-docking of material during the distribution reduces throughput times. Manual assignments or an automatic determination can determine whether a product is deployed to a location in push or in pull mode.

       2.      Review safety stock and economic order quantity, and simulate calculation

Interactive safety stock and economic order quantity planning can display the results of the safety stock and economic order quantity calculations as time series or as chart. It displays the economic order quantity as quantity and as periods of demand, the safety stock and its components, the reorder point, and the maximum inventory level.

The planner can also use interactive safety stock and economic order quantity planning to change influencing parameters and simulate the effects on safety stock and the EOQ. The planner can also override manually the results of the prior safety stock and EOQ calculations and save those results.

Result

The result of this process is a plan for safety stock and the economic order quantity for each planning relevant product location combination mainly consisting of three time series:

·        Safety stock

·        Economic order quantity

·        EOQ periods of demand

The results are used in the supply and distribution planning processes.