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hi guys Ian Johnson from drivers success.com today we're going to talk about calculating a safety stock and in this case we're talking about determining a minimum inventory count in order to protect your company against the high cost of an inventory stock out and when you measure the cost of an inventory stock out you're talking about loss sales loss gross profit loss customers and loss market share okay so a safety stock is most often associated with mid Max however it also applies to jit which is why I put it in parenthesis because even in just in time Supply chains you need a little bit of just inase inventory okay so I'm going to go over these four steps in terms of defining uh your replenishment time the daily consumption in terms of your sales to your customers Safety stock and your actual delivery to your customers once you generate a sale okay um but before we get started on these four points I just wanted to say that there are a lot of calculations out there there there are a lot of very complex calculations that account for all kinds of different variables multiple vendors failure rates all kinds of different things and we're accounting for some of that in this four-step process but I'm trying to simplify it as much as possible because to be quite honest with you it is a relatively simple process and it comes from trial and error the more you analyze it the more accurate your safety stock level is going to be okay so let's talk about replenishment time you'll notice I didn't put delivery time here because your vendor's delivery time time to your location is only one portion of your replenishment time in this case we're talking about the time it takes to generate a purchase requisition to get it approve to email it out to your vendor the delivery time from your vendor the incoming inspection time and the time it takes to put it on the Shelf okay so it's not just delivery time so in this case um the company has determined that its replenishment time should take 6 days but of course they're going to track the actual uh number of days in terms of replenishment time so we've got five shipments here six 6 6 6 and six are the expected replenishment time in terms of days and the actual are 11 days 9 days 11 days 5 days and 4 days the variance is + 5 + 3 + 5 -1 and -2 so the last two shipments were early okay so in this case we want to determine what the replenishment time is and we want to account for the variances so in this case we're going to add up the variances 5 plus 3 is 8 + 5 is 13 - 3 is 10 divided by the number in the sample portion which is five gives us two so we're going to add two to our expected replenishment time and again the more the more uh shipments you analyze and the more often you do this analysis the more accurate your variance is going to be okay so in this case we're coming up with a replenishment time of 8 days now this number means we must cover enough inventory to support the company's sales for 8 days and that leads us to the Second Step daily consumption this pertains to the daily sales that you make on average of this particular product okay so what I've done here is I've accounted for four weeks Week 1 2 3 and four sales volumes are 500 unit 600 700 and 750 so for the month we've got 2550 and we don't divide it by 30 days we divide it by the number of buying days in this case we assume five buying days a week Monday to Friday so we do 2550 ided 5 10 15 20 20 days gives us 127 units per day in terms of an average sales volume so again make sure you account for buying days not days in the month okay because it'll skew your number now we're going to move over to Safety stock so we need to cover 8 days at 127 units for each day very simply it's 8 Days time 127 units our safety stock is 1,60 now a lot of companies just stop right here okay a lot of companies just say that's the that's our safety stock that's our reorder point we don't want it to go below there and if it does we're going to order right away however I've added a fourth step and this fourth step accounts for your delivery okay in terms of your company's delivery and this basically allows you to kind of reduce your cost of financing okay my my my uh opinion is is that if you've got a product with a high inventory turnover rate that you know you're always selling it then you should stop right here okay that that's just my opinion it allows you to account for unforeseen spikes and demand however you can use your delivery date or your delivery time to your advantage and to give you an example let's say let's say that you know that it takes you two days to deliver product to your customer you're not going to tell them two days you're going to tell them 4 days you're going to say it's going to take us a maximum of 4 days you're going to buy two days which allows you to Discount your safety stock okay so in this case instead of covering 100% of6 you're going to cover 75% which is 762 units which equates to 6 days okay the6 is 8 days so if you want to basic if you have flexibility in your in your delivery times to your customers you can use it to your advantage if you know it's if you if you're guaranteed that you deliver it within two days tell your customer a little bit more 4 days it allows you to basically save a little bit on inventory um by having to cover the full amount because in this case you're basically covering yourself for two days so even if you you only have to cover for six instead of eight so you got two days to play with okay so that's that's essentially the entire process Define your replenishment time account for the daily consumption in terms of sales per day on average determine your safety stock and if you have flexibility with your delivery times to your customers use that to your advantage and discount the amount that you have to carry in your inventory which would help you reduce your finan so that's it Safety stock um make sure that you protect your company against the high cost of an inventory stock app so that's it Ian Johnson drivers success.com bye-bye