Two Thoughts on Safety Stock

Jean-François Baril, Senior Vice President, Sourcing and Procurement for Nokia Corporation, based in Espoo Finland, commented this week in a panel discussion hosted by SCM World and moderated by Kevin O’Marah, that “risk management is embedded in everything we do,” pointing out that supply chain managers not only have to manage what they see, but also what they do not see. 

As we move into a shortened work week that launches the holiday season, managers of value networks face multiple risks including currency fluctuations, money supply, uncertainties about the future of sluggish economic growth, the directions of regulatory efforts, and lagging consumer confidence, to name a few.  Just as the management of information cannot be the sole purview of the IT department, so the management of risk in the value network must go beyond an executive or department that is designated by that name.  Management of risk in the value network will always remain a cross-functional endeavor. 

More exotic risk management approaches such as those I have touched on previously (Supply Chain Matters and Supply Chain Action 7 October) will be much more effective if some of the less exotic “blocking and tackling” is in place to deal with more regular volatility in your business.

Inventory decisions and decisions regarding supply chain flexibility rank among the most important that your company will make and are significant drivers of enterprise value or lack thereof (Journal of Enterprise Resource Management).  One the inventory side, safety stock or buffer inventories are key decisions to help deal with volatility in demand (and hopefully supply).  On this Friday, here are two ideas to consider in this regard:

1)      Since safety stock is calculated and intended to compensate for historical variability in demand and supply, you probably should not update it every time you rerun your supply plan (e.g. Oracle ASCP or SAP APO) unless there is reason to believe that there will be a step change one way or the other in that variability in the future over lead time (plus the review period).  Updating safety stock too often can create additional noise in your supply plan that will only cause excess expediting costs.

2)      I tend to be a purest when it comes to getting a mathematically rigorous answer for safety stock, even in a multi-stage, stochastic environment (Supply Chain Action 29 September), because I don’t want to leave any money on the table.  However, you can sometimes reach unanticipated diminishing returns if planners do not use the “rigorous” answer because they do not understand it.  So, consider the need for planners to understand and interact with the safety stock calculation and its result when you decide how “pure” the calculation needs to be.

Thanks for stopping by this Friday.  I won’t be making a post (or at least a full one) next Friday since we will be celebrating Thanksgiving in the US, so as you go into short week ahead, remember the words of one, W.T. Purkiser, who said, “It’s not what we say about our blessings, but how we use them, that is the true meaning of our thanksgiving. “

Have a wonderful weekend and a terrific Thanksgiving.

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About Arnold Mark Wells
Industry, software, and consulting background. I help companies do the things about which I write. If you think it might make sense to explore one of these topics for your organization, I would be delighted to hear from you. I am employed by Opalytics.

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