Important Notice: Our web hosting provider recently started charging us for additional visits, which was unexpected. In response, we're seeking donations. Depending on the situation, we may explore different monetization options for our Community and Expert Contributors. It's crucial to provide more returns for their expertise and offer more Expert Validated Answers or AI Validated Answers. Learn more about our hosting issue here.

What error measure to use for setting safety stocks?

0
Posted

What error measure to use for setting safety stocks?

0

There has always been a lot of confusion about what error to use in calculating the safety stock measures for inventory management. Although the classic formula for safety stock setting says it is the average error over lead time, practitioners have interpreted this to mean various things. The more common and the most mistaken notion is to use the standard deviation of actual or historical demand pattern as the proxy for error in setting safety stock policies. The safety stock formula is the product of three components – forecast error, lead time and the multiple for the required service level. Using the standard deviation is similar to saying that the supply chain does not believe in the accuracy of the demand plan. In other words, the finished goods planner is implicitly saying that the average demand over the last few weeks or months is a better predictor than the demand forecast that was sent to him by the demand planning team. With all the investments that are made in the demand p

Related Questions

Thanksgiving questions

*Sadly, we had to bring back ads too. Hopefully more targeted.