Safety Stock: Everybody Wants to Use, Nobody Wants to Own

Describes three key factors-demand variability, supply variability, and strategic considerations -which should be used in the calculation of safety stocks... less inventory will be needed if we consolidate labels of Spanish-speaking countries into one label product instead of having a separate label for each country...if your suppliers are sometimes late, then your model should account not only for how often they are late, but also by how much. Companies use safety stock to reduce the risk of stock out and to keep the customer service high. The question is how to determine the right amount of safety stock. In this article, we share our experience about the safety stock model that we use at Eli Lilly and Company, and show the factors we account for in the calculation, and why. Safety stock is a major cost to a company, which must be kept under control to run the business smoothly and efficiently. Companies can do this without making large investments in tools because it is not necessary to have expensive tools for the best results. We have found that readily available tools, such as Microsoft Excel, can easily be used to calculate the desired safety stock levels. However, we still need business processes to manage their implementation, which can be done by a supply chain manager. Here we will describe the methodology and the tool used at Eli Lilly to calculate safety stock targets, as well as the process to manage the targets across different business units. Lilly provides customers Answers that Matter through innovative medicines manufactured at plants across 13 countries. We will first describe factors we account for in determining safety stocks, and then the modeling tool used to compute them to ensure availability of material. Finally, we will show how to use the model for an efficient supply chain management. FACTORS INFLUENCING SAFETY STOCK LEVELS Several factors influence the level of safety stock. However, at Lilly we look at three factors, which are: (1) demand variability, (2) supply variability, and (3) strategic considerations. Although appropriate levels of safety stock can be determined by using just one or two of these factors, due to the nature of our products and manufacturing lead times, we consider all the three. In our model, we use the following equation: Safety Stock = SS^sub Demand^ + SS^sub Supply^ + SS^sub Strategic^ where SS^sub Demand^ = Safety stock required to account for demand variations SS^sub Supply^ = Safety stock required to account for supply variations SS^sub Strategic^ = Safety stock required to account for strategic considerations Let us now look at each of these factors in detail. The first is demand variability, which describes the quantity of safety stock carried to account for variations in demand. At a sales location (or distribution center) this is the variability in actual sales vs. forecast. This variability is quantified as forecast accuracy expressed in percentage. If we want to have safety stock expressed in number of days, we calculate the safety stock needed to cover demand variability as follows: SS^sub Demand^ = (1 -Forecast Accuracy) × Lead Time = Days of Coverage Needed If, instead, we want to determine safety stock in units, we calculate it as follows: SS^sub Demand^ = Days of Coverage Needed × Average Daily Usage Whichever unit of measure we choose to describe our safety stock (days or units), we must be consistent across all three factors: demand variability, supply variability, and strategic considerations. The next factor to be covered by safety stock is supply variability. Here sales locations must determine the variability between the actual delivery date and quantity and the promised delivery date and quantity received from their suppliers. This is identified in our model as Supplier on Time Delivery, expressed in percentage. That is, the percentage of deliveries from the supplier made on time and in full quantity (or within a quantity tolerance). …