Welcome,
 In last week’s issue, Issue 80, we discussed how being prepared for a recall will help drive the cost of the recall down. In the next few issues we are going to discuss how being prepared for unscheduled events can reduce out of stocks and save you money. In many issues of this Newsletter we have stressed the importance of knowing exactly how much your inventory is costing you to keep and the faster you turn that inventory the more money you save. In Issue 64 and Issue 71, especially, we broke down these topics to a very simple level.  In these next few issues we are going to talk about a topic that is very important to those two processes, Safety Stock. I’d like to acknowledge an internet article written by Mr. Jon Schreibfeder named “A New Look at Safety Stock” as topics within that article contributed to this week’s newsletter. John as been a frequent contributor to our Newsletter and his web site is very helpful in understanding inventory management.
Sincerely,

Paul Hernandez-Cuebas
Editor

 
 
  
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October 3, 2006
Volume 2 Issue 81

Safety Stock Helps Against Out Of Stock

As we discussed in detail in Issue 64, you can save a lot of money by turning over your inventory faster. We put together a simple example that showed how when a company turned over their inventory 3 more times a year they saved $100,000 in inventory investment and $25,000 in carrying cost! Saving money by turning over inventory is all well and good but BE WARNED, the faster that you turn over your inventory the more risk you run of getting out of stock items. As we have said in past issues, out of stocks don’t only hurt your bottom line they hurt your reputation and as we all know if you lose your reputation as an efficient company you probably will end up losing business. A major player in protecting your self from being out of stock is accurately knowing your reorder point. The reorder point simply is, knowing when to reorder your product as compared to the number you have in stock.

Let’s say for example that you sell an average of 25 cases of ham a day. The average time it takes for you to order the product and arrive at your warehouse, commonly referred to as lead time, is 10 days. With these numbers known you say that you on average sell 250 cases of ham every 10 days.  You now know that you always have to stock at least 250 cases of ham to be ready for the next 10 days.

This reorder point calculation can be looked at as a par value, an older term that older guys remember. It is what you should sell in a 10 day period, although you may actually sell less of more.  If there is a time in your warehouse where you have less than 250 cases in stock you run the risk of not being able to fill your normal orders. Now let’s say that your stock hits 250 and it is time to reorder. You place your order and expect to receive the product in 10 days. 5 days later the manufacturer calls you and tells you that they have had some manufacturing issues and your product will be 3 days late. This is a huge problem because you only have stock to support you for the next 5 days not the next 8. That is where safety stock comes into play. Our friend John Screibfeder defined it simply as, “safety stock provides protection against running out of stock during the time it takes to replenish inventory.” Basically it is extra units of inventory carried as protection against possible out of stocks. If you had the correct amount of safety stock available you may be able cover yourself for at least 1 or 2 more days if not for the entire time. It is a lot better to be out of stock for 1 day than 3 days. There are two important reasons to carry the correct amount of safety stock:

1.      I am sure that all of you reading this newsletter do some type of forecasting for products. It does not have to be a sophisticated software package, it could just be that you know that every summer you sell more hot dogs than in the winter. You may know that you need to sell more but you don’t know how much more. Safety stock is needed for those times when you may have forecasted wrong or there was something out of your control that made your product more in demand. It is there to help ensure that you can fulfill customer requests for a product during the time needed to reorder it.

2.      Let us be honest. In a perfect world, if it takes 7 days from ordering to receiving then it should always take 7 days. AS we saw in our example and back in reality we know that this is not always the case. The truck carrying your product may have broken down, is behind schedule, or there was manufacturing problems. There could be many different reason why your product is not their on time. (I am sure you guys have heard them all.)  Safety Stock provides protection from out of stocks when the time it takes to receive a product is longer than you expect. 

We have now laid out the ground work of what a safety stock is. In next’s week’s issue we will be discussing how much safety stock you really need and carry and how to calculate that number. As we said in Issue 80, being prepared will save you money.   

SAFETY STOCK HELPS PREPARE FOR SAVING LOST  REVENUE AND KEEPING CUSTOMERS HAPPY

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