Tales of the Safety Stock (part 2)

Safety stock is not a secret stash of material, well hidden under a classified door – with the single key being held close to the heart of the Logistic Manager – only to be taken out to light when all the other non-safe stocks run out! But rather it is a defined quantity of material which needs to trigger the re-fill (or re-order) – always in close connection with the transportation lead-time! Let us look today at two other golden rules that need to be respected when defining the Ss – and finally draw some conclusions.

Low inventory is the key!

Rule #5 – Transportation lead-time is essential!

Although being a very simple and useful tool, it is too often wrongly used, causing confusion, material shortage or overstock. The transportation lead-time is a fix data, expressed in days or weeks – that is essentially linked with the supplier location. For one particular supplier you might need to figure out several logic for the various materials purchased, but the transportation lead-time is always the same!

Generally speaking – the various Transportation lead-times* fall under these categories:

i) Local suppliers – these are the suppliers within a range of about 75-100 km. These are the nice to have providers which can supply goods from one day to another. (In an ideal world, one in which the Logistics Manager will only plan and supervise, all suppliers of bulky and expensive material will have a shipping point within 100 km radius. But I am afraid when that day will come, logistics will be boring…). Transportation lead-time – 1 day.

ii) Regional suppliers – radius 100-500 km. These are the suppliers which can supply goods in max 2 days (always counting a regular or standard shipping method). Transportation lead-time – 3 days.

iii) Continental suppliers – the suppliers that are within a distance from 500 km – to the limits of the continent. In this case you might want to consider two steps – from 5 to 7 days.

iv) Overseas suppliers – though you might be tempted to be abundant in this case, but caution is one thing and exaggeration is a whole different walk in the park. Setting 7 weeks instead of a 4-5 weeks transit time might send your stocks ballistic and you wouldn’t even notice it until it’s too late. Ponder it carefully, and again fear the one set-up for all! Consider 4 wks for North America (Mexico/US/Ca), 5 wks for South America, 2-3 wks for the North of Africa (Egypt/Morocco/Tunisia, etc), 4 wks for South Africa, and so on. And yes – 5-6 wks top for Asia (Japan/China/India/Taiwan etc).

Rule #6 – Judge by commodity!

If your inventory is already defined in commodities, then hurray for you! If not – put that engineering mind to work and do it yourself! The bottom line is that Ss always works in mysterious ways, and one mystery is how different commodities act differently in real life. Take fasteners for example: you can never have enough screws, nuts, bolts, washers, rods and rivets. So don’t even invest much time – just set up a Ss equal to your two-weeks consumption, and get on with it! (Yes – this is an easy one!)

Obviously – there are more than one commodities out there – and you might manage everything form electronics (PCB’s or micro-switches) to ADR materials and perishables if working in FMCG. Whatever your inventory breakdown is – you can always set aside the peanuts from nuggets and focus on those costly items out there.

A final word

I have spent an awful lot of words on what to consider when defining the right Ss for your inventory – and that is because it is of crucial importance to identify and map the variables if you want to job well done.

At the end of the day – you need to look at all your inventory (obviously on a spreadsheet, there is no other way since God created Excel in the garden of Office) – gather the basic data, look at the informal facts (like supplier flexibility), and set up that Safety level. A robust and well-defined Ss will save you from lots of headaches and give you just enough elasticity to handle sudden increases, truck delays, major astrophysics catastrophe or supplier backlog.

An example

However, the fact that you have gone so far – it does not mean that all your job is done for now comes the next mission – how to keep your stock figures reliable? Coming soon!

*I had considered as an assumption that your physical location is a country of Europe, but the rules are the same whatever the continent.

The happy life of one safety stock

Secret wishes 

The wish of every production manager I have ever had the honor to work with is to have at hand all the material they need for a batch of gazillion pieces with one changeover/week. Which is fine!

Decisions… decisions… decisions…

The wish of every sales manager – to have all products on the shelves (even the most tedious low runner), with absolutely infinite capacity behind the operation team. Which is also fine!

The wish of every CFO – to have 0 stocks of materials at the end of every month, and watch the truck with the last finished product go out the gates. And this is perfectly fine!

The wish of every purchasing responsible – have a global deal with an Asian provider*, getting the best price out there backed by a payment term that would defy time and space altogether! An obviously – it’s fine!

And what about Logistics’ guy wish?

Caught between an unprecedented request for flexibility  on one hand – and the financial constraints on the other – what is the Logistics Manager to do in order to satisfy all the requests, feed the production, keep the stocks levels within the agreed limits and reach a reasonable inventory turn? One of the obvious answers is – wish for a safety stock, and use it wisely! In today’s post – a few rules to observe if you think you should start using (or revising) your safety stock (Ss). 

(For the purpose of this page – I will skip the theoretical details, and focus on more hands-on, operational rules; however, if you are looking for some simple, user-friendly formulas to ponder upon – the internet is quite helpful: https://www.skuvault.com/blog/safety-stock-formula – here is one very good example).

Rule# 1 – Keep it dynamic

First and foremost, it is important to understand that one cannot simply set up a wonder formula for the safety stock – and live with it for the rest of the activity. Business grows and falls, products have a certain rhythmic dictated  by the market and the company policy – so you should always keep this in mind – your safety stock levels need to be revised, updated and modified. Frustrating? Yes! Annoying? Definitely! Helpful? No doubt – if you want to stay on top! 

So abandon hoping you would do the work once and forget about it for ever – one rule of thumb states that the Ss needs to be revised at least every six months OR if there is any change in the product! So be aware – because once you go safe, you want to stay safe!

Rule# 2 – Finished product or raw material?

So you took on the journey! But even before you had started – the question raised: what is the best way? Should I invest time, money and energy to have a number of finished products at hand, or I better focus solely on the materials? The answer to this is quite complex – but it needs to be defined in order to proceed. Although the answer seems go for material stocks – and Make to Order – there are a few cases i want to point out.

i) What is the production lead-time in your industry? If your reaction time from order to shipping is 5 days or less (and your capacity can absorb at least 25% demand increase) – then figure out the stranger products in the portfolio (should be max 20%), define a reasonable Ss – and stick to that. All other efforts should be consumed for building material safety stocks.

ii) What are the sales peaks (hi-season)? Typically – an ice-cream producer would have 99% of the sales in summer – and as true and obvious this might seem in the ice-cream industry, it does not match every business out there. You might need to consider a time lapse in your safety stock management – go for those high selling days (or closure period) – when you absolutely need some stock at hand.

iii) What would generate the biggest loss? In a simple formula where one would consider that the component cost is less than the cost of the final product – then definitely go only for materials on stock. However – make sure you have all the math right! Do you have any additional cost? Any storage costs? Maybe some shelf life cases (like Vaseline, glue, silicone – and I am not entering the FMCG case)? Is your inventory subjected to SDD (sudden disappearance disease)? Do you have enough depot space? Do you not need any extra heads to manipulate the reserve?

Rule# 3 – Deep dive

Analyze your inventory. Do it seriously, do it thoroughly! Which are your hi-runners, which are the most expensive components, which have the longest lead-time, which of them have an expiration date, which have had quality issues in the past, which is the packing dimension and pack unit for each one, which ones are requested by Spares channels, which ones will phase out… Understand the usage – look at the past consumption and perform an analysis of the potential peaks. Fear not of Gemba go on the shop-floor, into the warehouse, down on each line – see for yourself! Go into details, write down everything and do not limit yourself to ABC in cost and quantity of your inventory. 

When you have drawn your list of the inventory (keep in mind that Ss is not requested for ALL the products in the portfolio) – design individual safety stock level for each product. Yes – it sounds tedious and long, but if you want it well done – you need to do it the hard way. And it should be done in less than one week time if you put your all efforts into it. (But who has one week for that – I hear you cry!)

Rule# 4 – Know your suppliers

To succeed in this matter, it’s crucial to know and understand the supply chain. You have a phone and you have an e-mail? Then get on to it. Network a little bit, check on their capacity and flexibility. Ask about their main issues with regards the product they make for you. Check whether the products you purchase from them are catalog items or whether you’re an only buyer. Try to understand their potential issues and bottlenecks, see where they could support if a sudden increase would arise, and where they would have an issue unless they have a solid forecast at hand. (You might even discover that they are willing to keep a stock themselves – exclusively for your convenience). 

Document the packing specification of each specific supplier and item! I cannot stress enough the importance of such information! To manage your safety stock correctly – you must recognize what type of items you purchase: number of parts/container, carton box, plastic box, wooden crate, metal container, type of product, weight, dimension… All these sum up to validate your safety stock – as the material will request a physical location to be stored, and you might want to know how to manage that!  (And this info obviously proves useful in the not so unlikely event of an urgent shipment).

Last – but definitely not least – check their exact shipping location for the goods you get from them. A rule of thumb says that if the supplier is within an area of 500 km or less – the safety stock one should uphold is max one day (with the only exception of strange materials – i.e. materials with usage once/trimester or less). The farthest your supplier – the bigger the safety stock – but more on that on a 2nd part of this blog!

*This is not a comment about the quality of Asian merchandise – but rather a complaint about the long lead time and constant customs headaches that Asian supplier inevitably (though unwillingly) do bring about.

The beginning of a beautiful friendship!

Hi there! I am Bogdan – and this is where I will share my knowledge. Whether you are fresh in the Supply Chain matters – or a professional with a long streak of won battles – this blog will strive to teach, communicate, discuss and keep you updated with the best practices in the business.

About me: mid thirties, +15 years in the Industrial Logistics and Supply Chain (different positions, several companies); happily married, father of two adorable (yet mischievous) little boys.

About you: learning mindset and ready to learn something new or analyse old information from a different perspective.

 Welcome – and let’s get started!