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Comments about Safety Stock Calculation.
Generally, the safety stock = (standard deviation)*(service factor)
But we must to adjust this equation in actual business scenarios.
Safety stock = (standard deviation)*(service factor)*(lead-time factor)*(order cycle factor)*(forecast-to-mean-demand factor).
Lead-time factor. This is necessary to compensate for the differences between lead time and forecast period. The standard deviation was based on the forecast period, a factor is necessary to increase or decrease the safety stock to allow for this variance. A formula you can try is lead time factor = square root (lead time/forecast period).
Order cycle factor. Since longer order cycles result in an inherent higher service level you will need to use a factor to compensate for this. A formula you can try is Order cycle factor = square root (forecast period/order cycle).
Forecast-to-mean-demand factor. Remember that the original statistical model was based upon the mean of the distribution. Substituting a forecast for the mean in the calculation of standard deviation creates a problem if the forecast mean and the actual demand mean are not close and also if the forecast varies between forecast periods (seasonality, sales growth). Sorry but I don't have a canned formula for this one that I feel confident enough with to publish. The actual formula used will vary based upon the types of variances and the method for standard deviation calculation used. |
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