WHAT IS SAFETY STOCK AND WHY DOES IT NEED A FORECAST?
Safety stock is a buffer of extra stock designed to compensate for forecast error. Without a comprehensive forecast technique, there can be no forecast error. Without a forecast error, there can be no good safety stock calculation. Although safety stock is calculated – and not actually a forecast demand – it represents a very real cost when evaluating the level of stock to be maintained. This value may seem like an arbitrary number. It is not! If management arbitrarily reduces stock, then chronic shortages may develop for some key items. These shortages can have a negative effect on return-on-investment by reducing sales and prohibiting income. Safety stock will typically vary more than optimal ordering quantity and, thus, have a somewhat larger impact on replenishment scheduling. In a manufacturing environment, production schedules could change as a result of changes to safety stock. In a distribution environment, vendor ability to fill orders in a timely manner can be affected. The v
