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1. General Information

2. Starting Up

3. Connecting data

4. Demand and Sales Forecasting

5. Inventory Planning

6. Reference

safety-stock-calculation

6.3. Safety Stock Calculation

There are two different safety stocks in Streamline depending on its configuration:

  • Safety stock – refers to the safety stock of any location’s warehouse. Its calculation is configured for all your locations at once.
  • DC safety stock – refers to the Distribution center’s safety stock.

Depending on the inventory replenishment strategy, the Safety stock (and DC safety stock) is an assessment of the reserve stock for:

Safety stock calculation methods

Depending on the model type, the way Streamline calculates the Safety stock is different.

For all the model types, except the intermittent model, Safety stock can be calculated using three methods:

  • Computed based on the given Service level percentage using the formula:

Safety~stock = alpha * delta * sqrt{t}, (1)

where:

  • α is determined by the given Service level unambiguously;
  • δ is unbiased standard deviation of the model on the learning set;
  • t is the Order cycle value if the periodic strategy is used, or the Lead time value in the case of the min/max replenishment strategy. The Order cycle and Lead time values are converted to the data aggregation periods before the calculation.
  • Taken as the demand of n data aggregation periods coming after the Lead time plus Order cycle. This number of periods is the Safety stock periods parameter of Streamline which is given by the user.

For example, if the data aggregation period is one month (monthly data), Lead time is 30 days, Order cycle is 2 months, and Safety stock periods = 2, then Safety stock will be calculated as summed demand of the April and May (see figure below). The number of the periods n can be also given as a fractional number.

  • The maximum from the two options above.

Distribution center’s safety stock (DC safety stock) can be computed using the same three approaches as the Safety stock. The difference is only in the formula (1):

DC~safety~stock = sqrt{SS^2_1(alpha,t) + SS^2_2(alpha,t) + ... + SS^2_m(alpha,t)}, (2)

SS_i(alpha,t) = alpha * delta_i * sqrt{t},~i = overline{1,m},

where:

  • m is the number of locations.
  • δi is unbiased standard deviation of the model on the learning set for the i-th location.
  • α is determined by the given DC service level unambiguously.
  • t is the DC Order cycle value if the periodic strategy is used, or the DC Lead time value in the case of the min/max replenishment strategy. The DC Order cycle and DC Lead time values are converted to the data aggregation periods before the calculation.

Safety stock for intermittent model

Let T is the number of data aggregation periods in future for which the Safety stock is calculated.

If T ≤ 1, then the Safety stock is an estimation the following log-normal distribution:

Safety~stock = 10^delim{}{Phi^-1(SL)hat{Dev}+lg(hat{Med})}{}, (3)

where:

  • Φ-1(·) - the quantile of standard normal distribution;
  • SL - a given Service level;
  • hat{Dev} - the deviation estimation of the log-normal distribution expressed in orders of magnitude. It is the Deviation parameter of intermettent model;
  • hat{Med} - the median estimation of the log-normal distribution. It is the Median parameter of intermittent model.

You can also adjust the Deviation and Median parameters manually in the Model tab.

If T > 1, then the Safety stock is calculated in three steps:

1. Find the estimations hat{Dev} and hat{Med}.
2. Correct the estimations in the following way:

hat{Med} = hat{Med}(1 + P_t * (T - 1)),
hat{Dev} = MAX[hat{Dev}(1 + P_t * (T - 1)) + hat{Med}^2 * Var_{B(T - 1)}, 0.01],

where:

3. Calculate the Safety stock using the formula (3) with the corrected estimations.

When T is fractional, there is no binomial distribution, but a formula for variance exists.

Final Safety stock

After Safety stock or DC safety stock has been calculated, Streamline refines it with one of the following ways:

  • Safety stock = MAX(Min. shelf, Safety stock) (defualt)
  • Safety stock = Min. shelf + Safety stock

If Min shelf is not imported, it equals to zero. You can switch between the ways in the project settings.

Safety stock debts

If you check the Debt received/passed option in the Show columns group of the distribution center settings, the Distribution center tab additionally shows two columns called Debt received and Debt passed (see figures below).

  • Debt passed shows DC safety stock debt passed to an upper echelon. Since DC is at the highest echelon in the two-echelon model, this column is empty.
  • Debt received indicates the total of the safety stock debts passed from all the locations (or all the other locations if DC incorporates one of them) to the distribution center. The location's safety stock debt is the quantity that is necessary to supply in order to keep location's Safety stock at the recommended level. It arises when location's Safety stock is consumed due to unpredictable fluctuations during the location’s lead time period.

You can view the locations’ safety stock debts in the Inventory report tab by the Debt passed column if you check the Debt received/passed option in the report setting (see figures below).

Here:

  • Debt received shows the safety stock debt received from a lower echelon. Since all our locations are at the lowest echelon, this column is empty.
  • Debt passed indicates the locations’ safety stock debt passed to the upper echelon which is distribution center.

The exact formulas for DC Debt received and location’s Debt passed are the following:

Debt~received = sum{i=1}{m}{Round_i(Debt~passed_i)},

Debt passedi = max(0, Safety stocki - (On hand - D(LT) + InTrn(LT) - PndSales(LT))),

where:

  • Debt passedi - the i-th location's safety stock debt passed to the distribution center.
  • Safety stocki - the safety stock for i-th location.
  • Roundi() - a function that rounds up the argument based on the i-th location's Rounding parameter. For instance, if the location's Rounding is 50, then Round(51) = 100.
  • m - the number of locations.
  • D(LT) - the demand forecast during the location's lead time period.
  • InTrn(LT) - the in transition quantity that should arrive during the location's lead time period except for the last time point of the lead time period (illustrated in the figure below).
  • PndSales(LT) – the pending sales orders quantity that should be shipped to customers during the location's lead time period except for the last time point of the lead time period.
The InTrn(LT) and PndSales(LT) take into account all of the arrivals and pending sales orders that occur in the lead time period except for the last time point of the lead time period (see figure below). Thus, if Streamline recommends ordering a non-zero quantity shown in the Order now qty column, then this projected arrival is not taken into account when the Debt passed is calculated.

If the distribution center incorporates a selling location, the safety stock of the incorporated location is calculated in the same way as for the other locations. However, Streamline shows the sum of this result and DC safety stock in the DC safety stock column of the Distribution center tab in this case.

Configuring safety stock calculation

Calculation methods of the Safety stock and DC safety stock are configured separately in Streamline.

To set up the Safety stock calculation method:

  1. Go to the menu File > Settings > Inventory tab > Safety stock section (see figure below).
  2. Select:
    • the first option, to calculate Safety stock using the formula (1);
    • the second option, to determine Safety stock as the demand sum of the given number of the future periods;
    • both options, to compute Safety stock as the maximum from the two options above.

To set up the DC safety stock calculation method:

  1. Go to the menu File > Settings > Distribution center tab > Safety stock section (see figure below).
  2. Select:
    • the first option, if you need to calculate DC Safety stock using the formula (2);
    • the second option, to determine DC Safety stock as the sum of demand of the given number of the future periods;
    • both options, to compute DC Safety stock as the maximum from the two options above.

As we mentioned, the Safety stock and DC safety stock are calculated based on the given Service level and Safety stock periods parameters. There are several ways to set these in Streamline. To learn more about them, refer to the Replenishment parameters configuration methods.


Next: Understanding Purchase Plan and Projected Inventory Levels

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safety-stock-calculation.txt · Last modified: 2019/03/12 12:07 by admin