Dealing with unpredictability

by R.T. "Chris" Christensen

This is Part 2 of my two-part series on safety stock. This article will help you classify safety stock as an inventory item and assist you in evaluating necessary levels. I want you to be confident you have enough materials on hand, but also be able to claim inventory reduction savings. A 50-percent reduction in safety stock is possible. Aim for this!

Before determining how much inventory to carry, let’s explore safety stock’s definition and why this inventory category exists.

Define safety stock in terms of risk. How big of a risk taker are you? What will you risk to not have parts on hand when you need them?

In the imperfect world we live in, it’s impossible to predict demand. We know approximately when we’ll need repair parts for equipment, but not exactly when. If a part has a 10,000-hour service life, does that mean we get 10,000 hours? No.

In actuality, the part’s life span falls between 8,000 and 12,000 hours. We know we must replace the part between 8,000 and 12,000 hours.

Plan to have parts available at the first possible, needed time.

In this case, have the part on hand at 7,999 hours.

Two inventory tools deserve assessment here. We already know when to have the part available (the 7,999th hour), but there are still two unknowns — the use requirement and the delivery requirement.

For the use requirement, we know the part’s expected life span. But what if that newly installed part breaks? You need inventory to protect against unplanned failures. It’s like the spare tire carried in your car’s trunk. You believe you’ll get 60,000 miles from a set of tires. You don’t need extra tires in your trunk waiting for the first set to wear out. But, assume you run over something and have a flat. The event’s timing is unpredictable. That’s why you carry a spare tire. It’s safety stock.

It protects you from the unknown.

Safety stock inventory is now defined. Even if you practice preventive maintenance and change the part at 7,999 hours, there’s still the risk the newly installed part will fail. Cover this by carrying another part in stock. But besides unpredictability of demand, you also must consider unpredictability of supply.

If we can count on our suppliers to deliver what we want, when we want it, and the parts are always in perfect working order, safety stock is not a concern. However, we do live in an imperfect world. Most of us need additional inventory to protect against supplier failings. When the supplier is late, or ships poor parts or ships the wrong quantity, we must add inventory — safety stock.

These are the only reasons to carry safety stock. With that spelled out, the question becomes how much to carry. It’s simple. Protect yourself from the worst-case scenario. Carry enough stock to cover the worst possible case of parts failure and protect against the worst delivery situation imaginable. Factor onto this your ability to recover from a worst-case situation. Can you get additional parts fast if your use rate goes up? How fast determines the amount of inventory. Also, how fast can you get a second source for the parts if your regular supplier fails? This defines how much safety stock you need.

Realistically, you only need to protect yourself from one of these situations — the longest one. If the use rate is more unpredictable, use the demand quantity (the other one will be covered). Use this only on high-volume parts as this is the only planned part of your inventory. For low-volume parts, put some in stock to cover the worst-case scenario.

One other safety stock item to consider is, how much will it cost the company if you don’t have any parts on hand when there’s a need? If the cost is low to have the machine out of service while you get parts, you don’t need safety stock. This applies primarily to lightly loaded equipment or where other machines are capable of doing the work while the primary machine is under repair. In this case, it’s cheaper to let the machine sit.

Now that you have some ideas why you have safety stock, look at your highest-use machines and figure ways to reduce the amount of on-hand inventory.

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