Death by Safety Stock – A Guide for the Modern Manufacturer

by | Updated October 6, 2020 | Dynamics 365 for Finance and Operations, Dynamics AX, Manufacturing

Finding a Better Way to Prevent Stockout

If you ever want to start a bar fight at an APICS conference, talk about removing safety stock. The modern manufacturer is particularly passionate about the subject. But what is safety stock, and is there a better option than safety stock to prevent inventory stockouts?

Safety Stock vs. Buffer Stock

Safety stock is defined as inventory that is carried to prevent stockouts. It’s inventory that you never plan to use.

Stockouts occur due to fluctuating customer demand, forecast inaccuracy, or variability in lead times for raw materials or manufacturing. Safety stock was the precursor to material requirements planning (MRP).

There’s often some confusion about the difference between safety stock and buffer stock. Safety stock is inventory that you never, ever plan to use. Its only function is to mitigate the risk of stockout. A buffer stock, on the other hand, is inventory that you plan to consume (and replace when your next order comes in). Unlike safety stock, buffer stock is not wasted inventory. If there’s any variability, it’s there to help you until you can restock.

Safety Stock and Inventory Stockout

You can run out of inventory for a myriad of reasons:

  • Your forecast is wrong
  • Customer orders suddenly (and abnormally) increase
  • Your inventory count was inaccurate
  • Your lead time for raw materials or manufacturing is lagging
  • You experience issues with vendor supplies

To prevent your MRP system from reaching this point, you could establish a safety stock value. Your goal here is to choose a number so that you drastically minimize the chances of dropping below zero inventory. The following clip explains this concept in greater detail:

 

Why do we need safety stock? It’s not designed to protect us against overstocks. Nor is it meant to protect us against item expiration, waste, or scrap. We use it as a short-term stopgap when our forecast is too low and our consumption is higher than expected. If you need that inventory right now, if you can’t wait on a vendor order, if you can’t ask your customer (or production) to be patient for two more days — safety stock is the system’s solution. It boils down to numbers.

How to Calculate Safety Stock Using a Formula

How do you decide a value? Let’s refer back to APICS. They’ll tell you the most commonly used formula —and believe me, there’s quite a few options out there.

Safety stock = (Max. daily usage – avg. daily usage) x lead time

It’s a fairly simple formula, but the variables require further definition. The video clip below explores the questions you should ask yourselves:

  • Whose usage are we talking about here?
  • What is my time frame?
  • How accurate should my lead time be?
  • Does this work with all products?
  • How do I track these elements?

 

Remember: at the end of the day, your safety stock is still planned waste. You’re telling your MRP system to never use that inventory.

Dynamics 365, Business Central, and Safety Stock Journals

If you’re using Microsoft Dynamics 365 Finance and Supply Chain Management (D365 F&SCM) or Business Central (BC), you have access to safety stock journals. A safety stock journal assists you with your calculations. You produce an average daily usage and set a date range for your system. Your ERP solution will apply your date range to end with today’s date. This won’t be helpful if you’re a highly seasonal business. (If your industry is highly seasonal, you shouldn’t be using safety stock in the first place. Your fluctuations are too variable).

Keep in mind, If you’re a brand new D365 F&O or BC user, you’ll need at least three months of transactional history in your system before you open your safety stock journal. Otherwise, there’s no gradation to those numbers.

Your safety stock journals will recommend the proper quantity and automatically update your system based upon these recommendations. You have the option to manually override here, as well.

The trick with safety stock journals is to update them regularly. Depending upon who you ask, the recommendation is to update monthly or quarterly. You’ll certainly want to update your journals often. Don’t do this daily, otherwise, you’ll cause problems with your MRP when everything becomes an action message. This video explains best practices surrounding safety stock journal updates:

 

Another important note: your system will come up with safety stock numbers based on sites and warehouses. If you have one item that is purchased, manufactured, or consumed at more than one site, your ERP system will generate different numbers based on your different sites. You can push your data out to Excel, work on your safety stock journal externally, and then post it back into D365 as an update journal. It’s a very nice feature to have. The next clip walks you through how to do this:

 

These ERP system capabilities give you some visibility into what your safety stock values should be. However, it’s important to use the safety stock feature sparingly. I once had a customer who maxed out their safety stock journal with approximately 72,000 items. There’s no way you can look at 72,000 items with a critical eye and determine each one needs to be under safety stock control. Beware the impulse to paint your safety stock journal with a massive paintbrush. Just because you want to ensure that you never run out of inventory does not mean you should create a safety stock for each item.

Let’s explore other methods that enable you to avoid using safety stock to prevent stockouts. Executed properly, these options will increase your confidence that you’ll have inventory when you need it (and not have it sit on the shelf indefinitely).

Better Methods to Prevent Inventory Stockouts

There are three ways to better prevent your inventory from running out. They are:

  1. Managing the lead time
  2. Picking your products
  3. Buying more by rounding up

1. Managing the Lead Time

The first thing you’ll want to do is get your lead times right. That way, when your MRP says “go buy” or “go make,” the likelihood of this event happening within the time frame is correct.

You know how these things can go. At the beginning of an implementation, everybody is enthusiastic about cleaning up vendor lead times and getting them all in the system. Your team negotiates with vendors or different shop floors, or you’ll put trade agreements in place that if I buy Item A from Vendor B, my lead time is six days. The “set it and forget it” mentality.

This is great, but you want to keep this information up-to-date. Get it right and keep it right. Rather than examine your safety stock journal, you should instead spend time looking at reports that compare your planned lead time versus your actual lead time. We recommend doing this for supply orders, purchase orders, subcontract orders, transfer orders, and production orders.

 

If you bump up a vendor’s lead time, you can ensure an extra day or two of coverage. Your inventory will come in a little earlier (meaning you’ll have the item on the shelf a little longer than you truly need it) but this gives you a supply of inventory without having to rely on safety stock.

Time Variability: Make to Stock

Make to stock (MTS) is tricky because you always want to have items on the shelf. One workaround here is to switch to a make to order (MTO) model. You’ll be able to assemble as the need arises, rather than making a finished good, keeping it on the shelf, and potentially discovering that no one plans to use it. Even if they do order it, nobody wants an aged, dusty, or visibly neglected item.

MTO is a great way to manage this time variability. Your goal is to make a finished goods (FG) decision as late as possible. Don’t invest time, material, and money to create a finished good just to have it sit on the shelf. You want to have the right thing available to the customer as fast as possible.

2. Picking Your Products

Be precise about your products. Pick only the items that absolutely need to be covered by safety stock. Again, it’s truly, truly not universal. Safety stock is a very antiquated method of protecting yourself from stockout. Here are some general items to avoid placing under safety stock:

  • High-cost items
  • Heavy (or large volume) items
  • Items with high associated freight costs
  • Common items that can be obtained quickly

Expensive items under safety stock are an investment in products that you never plan to use. From a business perspective, then, it doesn’t make sense to purchase items high in cost that you relegate to safety stock. Heavy items typically have high freight costs associated with them. High volume items will take up warehouse space and might not make the best use of your storage capacity. Finally, you don’t need to assign safety stock to common items that you can order and receive quickly. If you ever run out of stock on these items, it won’t cause business disruptions since you can obtain them easily.

3. Buying More by Rounding Up

The third technique to use instead of relying on safety stock to prevent a stockout is to simply round your numbers up. Use your MRP engine to get the right inventory at the right time (and probably a little earlier because you don’t trust your forecast and your customers are unpredictable and those people in production are dropping items left and right…). Do this by rounding your coverage period and your item numbers.

Play with your coverage period. Buy what you need for a period longer than what you need to buy for. Instead of looking out 30 days, for example, look out 45 days. Bring in everything you need for the next 45 days so you bump up your order quantity. You know you’ll use those parts or that material — it won’t sit on the shelf and never be consumed — but if something changes in those 45 days, you have enough time to then go place another purchase order.

Rounding your items up is a very simple, effective way of getting away from safety stock. It might just be enough of an adjustment if you round up by fives or tens. Of course, it all depends upon the item, size, weight, and freight costs. If its nuts and bolts and building materials, round up liberally. When you bring it in, bring in a large quantity. As your system sees demand chipping away at your inventory, you’ll have time (and inventory) to go out and obtain more to cover that fluctuation. This gives you several advantages:

  • Creates a buffer inventory
  • Increases your coverage period
  • Increases your lead time

Modern Manufacturing Guide to Safety Stock Summary

Safety stock isn’t always needed. It’s a very curious thing we’ve discovered as we’ve traveled the world implementing ERP systems: there are certain countries where safety stock is a de facto position. It doesn’t need to be. Safety stock is planned waste, planned obsolescence. You’re telling your MRP engine to never, ever consume that safety stock. As soon as you get down to that safety stock level, your MRP system will tell you to buy or make more. It never says to reduce your stock to zero and then buy more.

You have to manage your safety stock often. Your goal should be reducing the number of items you have under safety stock. Assigning safety stock values to all of your items is not the best use of your MRP engine, your planner’s time, your buyer’s time, your inventory, your warehouse space, or your other internal resources.

Concentrate instead on buying what you need. Plan to buy a little more or buy for a little longer, and focus on having buffer inventory versus safety stock. Tweak your variables (and for many, many items you don’t have to tweak them a whole lot). But, it’ll give you enough inventory coming in via transfer order, production order, or purchase order to give you some coverage over variability. Furthermore, it will protect you from having a large quantity of safety stock in your MRP engine that will never be used.

These suggestions help prevent safety stock from overwhelming your cash flow, warehouse space, and obsolescence rates. You’ll gain some degree of control, variability coverage, buffer inventory, and visibility into how (and when) your inventory is consumed. The alternative is to let your MRP system plan never to use safety stock items that collect dust on a shelf in your warehouse.

Learn more about Dynamics 365 for your manufacturing business by reaching out to the experts at Stoneridge Software.

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