As organizations seek to gain control over supply chain risk and variability, more and more networks are integrating vertically to own or collaboratively manage nodes upstream and downstream. Fewer supply chains today are single tier, meaning supply chain managers must now consider how to strategically manage inventory in more locations than before.
Most modern Supply Chains today are multi-tiered. Meaning they have multiple points of distribution in a one-to-many relationship from ultimate supply point down to final distribution point. This spans across almost all segments of business; from CPG to Retail companies and Manufacturing firms. A key decision in the profitability of a company is how much and where to put safety stock. This decision effects customer service levels, orders on time and in-full, return on investment, and space capacity requirements.
With this realization, what are the aspects of a multi-tiered safety stock strategy that need to be addressed? This blog reviews the guidelines and functionality that should be considered to optimize a multi echelon network.
What is a Statistical Multi-tier Safety Stock Strategy?
Since safety stock is crucial for a company, it’s important to have a strategy in place. Modern supply chains have multiple stocking points. A safety stock strategy should have an all-encompassing understanding of the entire network to be deemed optimal. It is simply not enough to determine a safety stock setting at a specific Item/Location definition without understanding the surrounding network.
Why is Safety Stock Strategy Important?
Safety Stock is a buffer for mitigating risk in the supply chain. The risks can come from every point in the supply chain where non-adherence to the plan can create deviations in the supply of product. This can include forecast variance, lead time variance, weather constraints, and labor constraints. It affects almost all the KPIs involved in modern industry. Everything from financial to service levels, to space and production constraints.
Questions and considerations for the development of a safety stock strategy:
- Is the company a Build-to-Order, a Build-to-Stock or both?
- What are the overall customer service levels desired?
- Where can safety stock be stored? At all sites?
- Are there lead times for replenishment at each destination node in the network?
- Can alternate sources of supply be employed?
- Does the company supply “slow moving” product? What is the products velocity through the supply chain?
- What is the ROI of a product? What is its importance?
- What is the variance of the demand signal? What is the variance of the supply of the product?
Standard single SKU safety stock calculations do not only take into account elements specific to the given SKU. Some examples are:
The issue is that these SKU level safety stock calculations do not consider the surrounding network and its ability to help address the optimization metric (cost, budget, quantity, CSL, etc.) at the given location.
The list above is just the standard starting consideration. More customized considerations can be added that are specific to the business. However, there are many factors that should be addressed simultaneously. An approach that ignores any of the above considerations cannot be an optimal solution. Let’s look at a couple of specific examples.
Manufacturer with low volume, high margin product
This is a build-to-order company with low volume and high margin products. This means that holding buffer stock is expensive but still imperative to maintain the high customer service level the company desires.
Buffer or safety stock should be held high in the supply chain (near the manufacturing) as stock lower in the supply chain costs more. This is due to picking/packing/handling and transportation costs being greater the lower in the supply chain the product is stored. Holding buffer stock higher, however, does bring up the total lead time to the customer. The longer the lead time, the less nimble the company is to changes in the demand signal. Which requires the need for buffer stock closer to the demand signal (customer).
A balance between these competing requirements needs to be considered to obtain a truly optimal safety stock strategy.
CPG company with high volume, low margin product
This is a build-to-stock company with high volume and low margin products. Holding safety stock lower in the supply chain is desirable to maintain high customer service levels. However, there is limited space allotted for safety stock in the customer facing facilities.
This company needs to utilize the warehouse level space capacity to optimize the customer service levels at the customer facing facilities. Lead times between the warehouses and facilities need to be considered along with ROI and where safety stock is retained.
The company has many constraints to address while simultaneously obtaining an optimized safety stock strategy. Balancing the requirements of ROI, lead time for replenishment, space constraints, etc. merit a holistic approach.
Tips and Reminders for a Safety Stock Strategy
Understanding that the number of considerations to simultaneously address when developing a safety stock strategy is a daunting task, it is recommended that a software product specifically made for this purpose be utilized. There are a few products in the market that address this. Below are some considerations when choosing a software solution:
- Segmentation/categorization of product sets
- Postponement of stock creation or movement within the supply chain
- Segmentation of sections of a supply chain for regional/global optimization metrics
- Customization of metrics used for optimization
- Many optimization variables (cost, quantity, ROI, budget constraints, etc.)
Neither a case-by-case heuristic approach nor a single SKU determination amount can account for all the constraints employed simultaneously. A linear programming technique is the best way to achieve a truly optimal safety stock strategy solution.
Do you have an optimal supply chain? Is it set up to have the best possible productivity for your company’s KPI’s? If you are not addressing all the considerations concurrently then you probably do not have the optimal solution. Not having the optimal solution results in either excess stock (to retain a high service level) or a lower customer service level.
Plantensive has many seasoned consultants capable of deploying these strategies and tools. If you are looking for help with your safety stock settings, let our experts help and get started with an assessment today.