Protecting Customer Service – Part 1

Over the last several months, we have been discussing when to order products in order to meet your customers’ expectations of product availability.  We have explored various methods for calculating accurate forecasts and maintaining anticipated lead times.  But no matter how much time and effort we put into calculating these parameters, you may still may face stocking challenges and possible stockouts.

Safety stock provides protection against stock outs due to unexpected demand for a product or delays in receiving a replenishment shipment from a supplier.  It is insurance.  Like most other types of insurance there is no “right” or optimum amount of safety stock.  When you are determining safety stock quantities, you must ask yourself, “how much do we want to invest in preventing stock outs of this product?”

The answer will probably be different for various products you stock.  In determining the safety stock amount for a product, you have to ask:

  • What is the likelihood that this product will experience a stock out?
  • How disappointed will customers be if this product is not in stock?

Products are more likely to be out of stock if they experience:

  • Inconsistent supplier lead times – If vendor shipments are often several weeks late, you may want to keep some extra stock to “cover” customer demand during these unexpected delays in receiving a replenishment shipment.
  • Large fluctuations in sales or usage – You might sell 10 pieces or 1,000 pieces of a product in a month without much notice of when usage will significantly increase.

Despite what your salespeople may tell you, customers probably don’t expect every item to be in stock 100% of the time.  Even if you think they have these high expectations, you probably can’t afford to maintain enough safety stock of every item to meet every customer request 100% of the time. 

For some items you will receive a few orders for a relatively small quantity.  Safety stock is usually not needed to fill these requests.  You might need some safety stock if you receive many orders for consistent quantities of an item.  However, you need a lot more safety stock if you receive a lot of orders for a product and the quantities requested range from very small to very large amounts.  In the last case, because you do not ship unusually large quantities of the item each month, large amounts of safety stock may sit in your warehouse gathering dust.  This inventory is not being sold or used and therefore does not provide a return on your investment.  

Also, do you have some products that are “critical” to always have on the shelf?  These are items that your salespeople and customers assume are always available, even when you experience unusually high usage.  These “never be out” items require more safety stock.

Though it is evident that some items need more safety stock than others, most distributors maintain safety stock quantities with some general rules that apply to all stocked products.  Next month, we will explore how to customize the safety stock rules for each stocked product to meet your desired level of product availability at the lowest possible cost.