Safety stock refers to product that is held in inventory in case of an emergency. It can create a contingency plan. Whether there is a sudden, unexpected increase in demand, a delay of products in transit, or problems on the production end, safety stock is needed to ensure that your company can operate for a specified time (selected by the operator) without interruption.
Here is an analogy that will help you to understand how safety stock works. Let’s say the flow rate of your car is 10 liters per 100 km. If you are embarking on a 200 kilometer trip, you will never fill the tank for exactly 20 liters; rather, you will always fill it up a little bit more, just in case. This is the safety stock.
Mycroft Assistant provides three options for calculating safety stock:
- Fixed value of each product in pieces. For example – 10 pieces is the absolute minimum balance of products in stock.
- A set for a period of time, for example, 3 days. According to the algorithm, this period increases the forecast horizon for this time. At the average daily sales of 10 pieces, the safety stock for 3 days will be 30 pieces. It is recommended that you use this option if you expect problems from the supplier in terms of product delivery time.
- Profit Oriented Theory of Constraints (POTOC) is a dynamic safety stock. It is calculated using the average of the sum of standard deviations for the period of analysis. Calculation of the safety stock in this manner is used when sale of stock depends on actual deviations that have occurred in the past. This calculation is dynamically produced at the time of the formation of recommendations.
The POTOC option most accurately reflects actual, real-life situations and is recommended for use when there is no need to hold a fixed amount in stock. It allows for the actual and correct amount of stock to be changed according to dynamics of demand. It is recommended for use if you expect there are errors in calculating of your sales forecast, such as when the scatter of the sales series over time is unstable. Using this method is the most effective way to solve the problem of overstocking or creating a shortage of products in stock.
The POTOC method of calculating the safety stock can be manually adjusted by specifying “Adjustment of the safety stock,” which is indicated as a percentage. By changing the 100 % shown in the diagram above to 80 %, the safety stock calculated in step 2 will changed. Here is how it works. The number 30 (shown to be needed for three days in step 2 above) is multiplied by 0.8 (rather than by 1.00). As a result, 24 pieces will be your reserve amount. Using this adjustment, allows you to reduce the product level in stock in order to reduce the amount of money invested in what are referred to as “the remainders.”
Using the complex BRT method (information about it is provided at LINK) and the POTOC method for calculating safety stock, you will achieve an optimized estimate of stock replenishment needs.
— Demand forecasting – information about it you can find HERE
— Sales analysis – information about it you can find HERE ;
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