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Documentation for Streamline 4.x

User Guide

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 centers' safety stock. Its calculation is configured for all your DCs at once as well.

Depending on the inventory replenishment strategy, 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:

  • 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 1 month, and Safety stock periods = 2, then Safety stock will be calculated as summed demand of the February and March (see figure below). The number of the periods n can be also given as a fractional number.

  • The maximum from 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.
  • 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(Display qty, Safety stock) (defualt)
  • Safety stock = Display qty + Safety stock

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

Safety stock debts

If you check the Safety stock debt option in the Show columns group of the distribution center settings, the Distribution center tab additionally shows the Safety stock debt section containing three columns: Received, Accumulated, and Passed (see figures below).

  • Received column indicates the total of the safety stock debts of locations at the lower echelon that is received by DC. The location's safety stock debt is the quantity that is required to restock in order to maintain location's Safety stock at the recommended level. It arises when the location's Safety stock is consumed due to unpredictable demand fluctuations. The formula for the DC Received debt is:

Received~debt = sum{i=1}{N}{Safety~stock~debt_i},

where:

  • N – the number of locations at the lower echelon;
  • Safety stock debti – safety stock debt for i-th location.
  • Accumulated safety stock debt besides the Received debt includes the forecasted locations' demand during the DC lead time that current DC on hand can't cover. However, Accumulated safety stock debt can't exceed the total of rounded locations' safety stocks. The formula for the Accumulated debt is the following:

Accumulated debt = MAX[MAX{0, Forecasted consumption - DC On hand} + Received debt, Max SS debt],

Forecasted~consumption = sum{i=1}{N}{Demand_i(DC~lead~time)},

Max~SS~debt = sum{i=1}{N}{Rounding_i(Safety~stock_i)},

where:

  • Demandi(DC lead time) – the i-th location forecasted demand during DC lead time;
  • N – the number of locations at the lower echelon;
  • Roundingi() rounds the argument up using the i-th location's Rounding parameter. For instance, if the location's Rounding is 50, then Rounding(51) = 100.
  • Safety stocki – the Safety stock for i-th location.
  • Passed column shows DC safety stock debt passed to an upper echelon. Since DC can't supply another DC, this column is empty.

You can view the locations’ safety stock debts in the Inventory planning tab by the column Passed of the Safety stock debt section if you check the Safety stock debt option in the report setting (see figures below).

Inventory planning tab is for planning your inventory at the lower echelon, thus, it shows replenishment plan for locations which are supplied by DCs. Since this is the lower echelon, the columns Received and Accumulated are empty (see figure above).

The Passed column indicates the location's safety stock debt passed to the upper echelon. The formula for the Passed debt is:

Passed debt = max(0, Safety stock - (On hand - Demand(LT) + Qty_to_receive(LT) - Qty_to_ship(LT))),

where:

  • Demand(LT) – the demand forecast during the Lead time.
  • Qty_to_receive(LT) – the item quantity that should arrive during the Lead time period except for the last time point (illustrated in the figure below).
  • Qty_to_ship(LT) –- the item quantity that should be shipped to your customers during the Lead time except for the last time point.
The Qty_to_receive(LT) and Qty_to_ship(LT) take into account all of the arrivals and shipments that will occur during the location's Lead time except for the last time point of this period (see figure below). Thus, if Streamline recommends ordering a non-zero quantity shown in the Current order qty column, then this future arrival is not taken into account when the debt Passed is calculated.

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

Configuring safety stock calculation

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

To set up a calculation method for the Safety stock:

  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 a given number of the future periods;
    • both options, to compute Safety stock as the maximum from two options above.

To set up a calculation method for the DC safety stock:

  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 a given number of the future periods;
    • both options, to compute DC Safety stock as the maximum from 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: 2019/04/18 08:46 by admin