Safety Stock Formula

by Shaun Snapp on May 11, 2009

 What This Blog Article Covers

  • What is safety stock?
  • What is the safety stock formula for what SAP referrers to as dynamic safety stock?
  • How does this relate to another concept called target stock level?

Background on the Safety Stock Formula

This blog article is with a simple safety stock formula and the graphic above is one of the more popular in the overall SCM Focus site. Safety stock  simply accounts for the variability in supply and demand in one formula. When this formula is enabled in SAP SCM SNP, it is referred to as “dynamic safety stock,” although it is not that frequently enabled, as is described in this blog article. This blog article has a number of insightful comments on them, which describe different experiences that people have had with this functionality.

The Dynamic Safety Stock Formula

Safety Stock: {Z*SQRT(Avg. Lead Time*Standard Deviation of Demand^2 + Avg. Demand^2*Standard Deviation of Lead Time^2}

This is represented graphically below:

Safety Stock

There is more detail on how safety stock is used specifically in SAP APO SCM in the blog article:

Safety Stock Versus Target Stock Level

It is also of interest to compare the safety stock, to what is referred to as the target stock level. The safety stock being only a component of the overall target stocking level. SNP can vary the safety stock in accordance with the service level. However, inventory optimization and multi-echelon planning software can flexibly move the entire target stock level up or down based upon service level.

This can be read about at the blog article.

Reference

From Inventory Management Review
http://www.inventorymanagementreview.org/2005/06/safety_stock.html

Shaun Snapp

Shaun Snapp is a long time supply chain planning software consultant, author & as well as the Managing Editor at SCM Focus. He focuses on both SAP APO as well as best of breed applications for demand, supply and production planning.

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