# 11.3.3 Safety Stock Calculation with Continuous Demand

### Intended learning outcomes: Describe different techniques for determining safety stock. Identify different patterns of the deviation of demand from forecast.

Figure 11.3.1.1 indicates that without safety stock, there will be a stockout in half of the cycles defined by the saw-toothed curve. This results in backorders.

Safety stock or buffer stock serves to cushion the impact of forecast errors or deviations in the lead time as well as in the demand during the lead time.

Anticipation inventories is a similar term, used in the management of distribution inventory. It means additional inventory above basic pipeline stock to cover projected trends of increasing sales, planned sales promotion programs, seasonal fluctuations, plant shutdowns, and vacations ([ASCM22]).

Figure 11.3.3.1 shows different techniques for determining safety stock depending on the nature of the item.

Fig. 11.3.3.1       Different techniques for determining safety stock.

The first two techniques determine safety stock in a largely intuitive manner. For the statisti­cal derivation, however, there are formal techniques available, as described in the following:

1. Statistical Fluctuations in the Lead Time

Fluctuations in the lead time due to unplanned delays in production or procurement, for example, are absorbed by a safety lead time.

The safety lead time is an element of time added to normal lead time to protect against fluctuations. Order release and order completion are planned for earlier dates (before real need dates), according to the time added.

Safety stock due to fluctuations in lead time is calculated simply as the demand forecast during this safety lead time. This technique is often used, because it is easily understood.

2. Statistical Fluctuations in Demand

For purposes of absorbing demand fluctuations, safety lead time is not a sufficient basis for calculation.

Fluctuation inventory, or fluctuation stock, is inventory that is carried as a cushion to protect against forecast error ([ASCM22]).

Figure 11.3.3.2 shows the pattern of demand for two items with the same demand forecast, but different demand fluctuations.

Fig. 11.3.3.2       Different patterns of the deviation of demand from forecast.

The fluctuation inventory for the item in Situation B must be larger than that for the item in Situation A. A pattern of demand that has only a small dispersion around the demand forecast will result in a smaller quantity of safety stock; one with large variation will require a larger quantity of safety stock.

Continuation in next subsection (11.3.3b).

## Course section 11.3: Subsections and their intended learning outcomes

• ##### 11.3 ROP (Re)-Order Point Technique, and Safety Stock Calculation

Intended learning outcomes: Explain the (re-)order point technique and variants thereof. Describe the safety stock calculation with continuous demand. Disclose the determination of the service level and the relation of service level to fill rate.

• ##### 11.3.1 The ROP (Re)-Order Point Technique

Intended learning outcomes: Present in detail characteristic data for the (re-)order point technique.

• ##### 11.3.1b Order Point Calculation

Intended learning outcomes: Explain the (re-)order point calculation. Identify the criterion for the release of a production or procurement order.

• ##### 11.3.2 Variants of the Order Point Technique

Intended learning outcomes: Identify the criterion for the release of a production or procurement order, if the customer allows a minimum delivery lead time. Explain the criterion for an early issuance of a production or procurement order.

• ##### 11.3.2b The Min-Max Reorder System and the Double Order Point System

Intended learning outcomes: Produce an overview on the min-max (reorder) system. Describe the double order point system.

• ##### 11.3.3 Safety Stock Calculation with Continuous Demand

Intended learning outcomes: Describe different techniques for determining safety stock. Identify different patterns of the deviation of demand from forecast.

• ##### 11.3.3b Service Level, Safety Factor, and Service Function

Intended learning outcomes: Explain safety stock in relation to service level. Identify the safety factor and the service function.

• ##### 11.3.3c Safety Stock Calculation with Continuous Demand Following a Normal Distribution

Intended learning outcomes: Disclose the normal integral distribution function (service function) to determine the safety factor that corresponds to a desired service level. Present the formula for safety stock.

• ##### 11.3.3d Safety Stock Calculation with Continuous Demand Following a Poisson Distribution

Intended learning outcomes: Disclose the Poisson distribution integral function to determine the safety factor that corresponds to a desired service level.

• ##### 11.3.4 Determining the Service Level on the Basis of Stockout Costs

Intended learning outcomes: Describe the order point technique where the length of order cycle provided by the batch size is a multiple of the lead time. Explain the probability of stockout in dependency on stockout costs per unit.

• ##### 11.3.4b Determining the Relation of Service Level to Stockout Quantity per Order Cycle

Intended learning outcomes: Present the service function (of the stockout quantity coefficient) P(s) in dependency upon the safety factor s. Produce an overview on and examples of the relation between fill rate and service level.

• ##### 11.3.4c Determining the Relation of Service Level to Fill Rate

Intended learning outcomes: Produce an overview on and examples of the relation between fill rate and service level.