September 09, 2006

Quick Reader Response

Quick little not on a comment I received on my post on Safety Stock.

Reader, Anish, said:

How could we calculate the safety stock exactly? The available equation
                   safety stock =reorder point -lead time demand

Well, what Anish did here was rearrange the SS formula and pointed out a way to figure out safety stock if you know re-order point and lead time demand.

This may be useful if you know your re-order point, and know your average demand but never calculated what your ROP should be and just want to see how much safety stock you hold.  By the way, I used the word average demand, which Anish did not.

Remember, if you know your actual demand, you don't need safety stock.  Chances are, you know you have a decent idea of what your average demand is, and with the knowledge of the standard deviation of that average, you can determine safety stock...which is the second term in the ROP formula, which my article on safety stock covers.

Good question by Anish, and yes, that is a way to determine what the safety stock you've been using is, not what it SHOULD be.

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The above formula applies only for the reorder point - order quantity system. The mathematical problem is to find the correct reorder point for a discrete time axis and often non-normal and dynamic demand. Many textbook formulas are wrong. See the new textbook [link deleted]

Posted by: student | Sep 25, 2006 10:42:43 AM

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