Experiences with Dynamic or Extended Safety Stock

What This Article Covers

  • What is Dynamic Safety Stock?
  • Understanding Dynamic/Extended Safety Stock in SAP.
  • How Often is it Used in SAP Accounts?
  • What are Some of the Surprising Results from the Use of SAP’s Dynamic Safety Stock?
  • Introduction to How Not to Calculate Safety Stock
  • How Safety Stock is Often Set in Reality

safety_stock

Introduction

This article covers the topic of dynamic or enhanced safety stock (SS) in SAP. This is one of the most common requested safety stock areas to be active in SAP SNP by SAP customers.

Dynamic Safety Stock in SAP

Extended safety stock SAP’s name for dynamic safety stock.

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} 

Safety Stock-2

This is a functionality which allows the SS to vary depending upon supply and demand variability. These values are entered into the Lot Size tab of the Product Location Master, as can be seen in the screenshot below.

Extended/Dynamic Safety Stock

I have often wondered why no client that I have worked with has ever configured this functionality. I had often attributed it to the problem in maintaining this master data. It should be understood that this is the standard dynamic SS method that is taught in textbooks. This is in no way SAP intellectual property. However, while interviewing for a contract position, I discussed this functionality with someone who had tested it.

Interestingly, she stated that the SS it came up with was high (this is, of course, relative, as it calculates the  correct SS.) However, another comment was that it was not very adjustable, and that adjustability was a requirement for them. In fact, planners fall into a habit of adjusting the SS when it should be auto adjusted.

More specifically, I question if the requirement will lead to good planning outcomes.

Dynamic SS and the First Release

I was once with a client that was interested in implementing dynamic SS in their first release. My view is that the first release is best for dialing in the most basic functionality. Most implementations put too much functionality into their first release.

I have seen dynamic SS get yanked out of a number of implementations, or I have heard of it getting disabled after an initial use. My view is that very few companies are presently using dynamic SS in APO.

Therefore, it is a “high risk” functionality, which is better left to later releases of implementation. Essentially, I see dynamic SS to be a high-risk luxury with a very low probability of successful implementation. In my view, there are many more important areas of functionality to work on, and simpler methods of SS such as days’ coverage are more durable and much higher probability of success.

Interesting Comment from LinkedIn on Why Dynamic SS Often Fails

I found this comment from David Ginsberg on a LinkedIn discussion which I found interesting.

Most statistical models on inventory fail to work operationally because they focus exclusively on “deviation of demand”. There are two additional criteria that must be taken into account… replenishment lot size and supplier lead time. If I could have “any” quantity “tomorrow”; that would require a different safety stock model then “some” in “six months.”

While SAP’s dynamic safety stock functionality does have a location for deviation of demand, in fact, it is rarely used even with companies that have attempted dynamic SS. Therefore, David Ginsberg’s criticism would apply to how SAP dynamic SS is implemented, even if it does not apply to the ability of the functionality.

A third limitation of the safety stock model is that it carries the additional inventory throughout the inventory cycle. Why carry safety stock when your replenishment order has just arrived and your inventories are far above safety thresholds? Often it is better to bring in the next replenishment order a period or two early. This is referred to as “safety lead time” and offers superior operational and financial model to safety stock. Planning the number of stock out periods to manage and then reducing the lead time to cover them will buy you more operational and financial performance than tweaking the math of demand-based statistical models.

I also found this final quote from David Ginsberg interesting.

If there were good tools for this, they would be used in the stock market, not planning parts. Avoid the “we predict the future better than anyone” pitches.

These answers were to a question on dynamic safety stock in LinkedIn.

How Not to Calculate Safety Stock

One of the primary mistakes made when setting SS is setting it reactively and not controlling its setting. For instance, safety stock is often used as a form of forecast adjustments by supply planning. If the forecast is considered too high, SS might be reduced, and vice versa.

  • Different individuals can have input to SS, but ultimately SS should be controlled by a policy and centrally by a supply chain planning group. While this is often the case regarding having some central responsibility at some companies, there is still more often than not control is given to make the changes given to a small group.
  • Having groups such as sales or individuals in distributed locations adjust the SS — under the argument that they “know the products” means that there is an increasing likelihood that the safety stock will be changed by people that don’t understand how SS fits with other supply planning parameters.

As is explained further in this article calculation of the overall inventory available for SS and cycle stock. And then assigned to the inventory on a relative basis.

This is a weakness of many of the inventory parameters when they calculate SS individually by the system. All inventory parameters should be calculated based upon the relative consumption of whatever the resource limitations are.

George Plossl has an interesting observation as to how safety stocks are often set that conforms with my experience at numerous clients.

Guestimates: Guestimates are probably the most frequently used, being easiest to apply, and are based on planners’ frequent personal judgement. They usually increase immediately after a shortage occurs but are rarely decreased.

Rules of Thumb: These are equally irrational, and require additional work to apply. A popular one bases SS on A-B-C inventory classification; expensive A-items should have little, moderate B-items some more, and low-cost C-items plenty. This ignores the protection furnished by lot sizes in excess of immediate requirements; C-items usually have very large order quantities and short replenishment lead times; they may not even need safety stock. Conversely, A-items are exposed more frequently to stock outs because of frequent reordering. (this is shown in the chart below)

Conclusion

While many people attempted to list the standard SS formulas, I think what needs to be discussed is why the dynamic SS calculation is not really used in companies. Rather than spending more time on reiterating complex SS formulas, the question needs to be asked: “why.” I believe part of the answer lays with the high forecast error that most companies have. However, a second problem is the dynamic SS formula itself.

At this article, I describe why I have concluded that the dynamic SS is a flawed formula that provides those that use it with overconfidence that they are modeling in all of the dimensions of SS when in fact the dynamic SS calculation models only one dimension.

Contrary to what one might think, I found that there have not been studies that show that the dynamic safety stock formula works well for companies. In testing of the formula myself, I was not impressed with the output. This lead me to develop my SS formula, which is explained in this article.

Finally, while the standard dynamic SS formula will not work properly, the other end of the spectrum of guessing or not using math to determine safety stock is also not effective. In fact, even the most common approach of setting a safety days of supply combined with a lower value (to protect the SS when demand declines) leaves out many other dimensions that improve the SS. We discuss this below.

References

Brightwork MRP & S&OP Explorer

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SAP ECC and SNP cannot be run effectively for MRP and supply planning without help from another application.

Brightwork Research & Analysis offers the following supply planning tuning software, which is free to use in the beginning. See by clicking the image below:

Safety Stock and Service Level Book

Safety Stock

Safety Stock and Service Levels: A New Approach

Important Features About Safety Stock

Safety stock is one of the most commonly discussed topics in supply chain management. Every MRP application and every advanced planning application on the market has either a field for safety stock or can calculate safety stock. However, companies continue to struggle with the right level to set it. Service levels are strongly related to safety stock. However, companies also struggle with how to set service levels.

How Systems Set Safety Stock

The vast majority of systems allow the setting of safety stock by multiple means (static, dynamic, adjustable with the forecast in days’ supply, etc..). However, most systems do not allow the safety stock to be set in a way that is considerate of the inventory that is available to be applied.By reading this book you will:

  • Understand the concepts and formula used for safety stock and service level setting.
  • Common ways of setting safety stock.
  • Service levels and inventory optimization applications.
  • The best real ways of setting both service levels and safety stock.

Chapters

Chapter 1: Introduction
Chapter 2: Safety Stock and Service Levels from a Conceptual Perspective
Chapter 3: The Common Ways of Setting Safety Stock
Chapter 4: The Common Issues with Safety Stock
Chapter 5: Common Issues with Service Level Setting
Chapter 6: Service Level Agreement
Chapter 7: Safety Stock and Service Levels in Inventory Optimization and Multi-Echelon Software
Chapter 8: A Simpler Approach to Comprehensively Setting Safety Stock and Service Levels

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