Last time we examined the problem of demand variability in the finished goods store, so now we need to consider the problem of protecting the company from unreliable supply.
For companies who buy and resell, such as distributors, for them to manage their inventory levels effectively, they need reliable suppliers who deliver on the agreed date.

If we move into the world of manufacturing where we have to be organised and work to a plan, then MRP provides the planning tool needed.  It schedules the work needed to specific dates so the master schedule can be met. For this program to be met, it requires the raw material to be available when needed. As inventory in many manufacturing companies is more than 50% of the cost of sales, and in some cases such as electronics it can be as high as 85 or 90%, then it has to be managed very carefully. To protect the manufacturing program the initial obvious answer is to keep plenty of stock for just in case. The problem is the cost involved, especially with the holding cost being in the range of 3% per month.

When we look at our raw materials stock, we have a different problem to the finished goods store. None of the problems we've looked at are applicable, as we are building to a plan so will not have demand variability. We need 100% service level as manufacturing cannot build a product with only 95% of the parts available. The lead time is known so the lead time can be off set so we place the order in time to received it for manufacturing to use. Thus safety stock is not applicable for our raw material store.

We need to protect manufacturing against late deliveries from suppliers so we need some form of protection or else the production line will stop. Talk to your buyer. He will tell you who always delivers on time and those who are unreliable. If a supplier always delivers on time, why do we need any form of protection. If a supplier is consistently 2 to 3 weeks late then we need to allow for that problem and put in place the required protection.

To protect manufacturing we need safety lead time.
Safety lead time is defined as a difference in time between the requirement date and the planned in stock date.  The approach for safety lead time is to know your supplier, as if he is always up to three weeks late, we need to give him a delivery date three weeks earlier than our real need date.  This way, if he delivers as normal we will get our material when we really need it at no extra cost.  What is the risk?  If he does improve and actually deliver on due date, we will get the material early. This is much less expensive that holding several weeks stock of all items for just in case.

Using the safety lead time method, we are not ordering or storing extra stock but just planning for our required material to be available when it is needed. Safety lead time also "fluctuates" automatically via the order quantity, whereas safety stock is a fixed and possibly wrong, quantity.  If you have an MRP system or computerised inventory system, you will probably find it doesn't have a data field for safety lead time.  The trick is to move the supplier's delivery date earlier by that period of unreliability.  Don't just increase his lead time, or else he will just have longer to lose the order.  Instead we need to inflate goods inwards time, which will effectively move the delivery date.

In summary, have safety stock on your forecast demand items such as finished goods stock, but put it on the items where it will give you the best return on your investment.  The only way to do that is to calculate it scientifically using statistical safety stock.  When you are building to a plan as in manufacturing, use safety lead time which is less costly and more effective than safety stock.
 
 

July 1999