I stumbled across a post that declared, "There is no such thing as safety stock. There's only inventory."
True, I’ve never seen a warehouse with safety stock tucked neatly beside cycle stock, each in its own designated zone. Customers don’t recognize the difference either. Have you ever bought an item and said, I wonder if this came from safety stock?
But while we don’t separate safety from cycle stock in the warehouse, these concepts can be incredibly useful for planners.
Why Separating Safety Stock from Cycle Stock is Helpful
Many companies don’t separate safety stock from cycle stock, physically or conceptually. Instead, they’ll use a round number like "8 weeks of supply" to cover both. While this is a simple solution, it creates problems during the Sales & Operations Planning (S&OP) process. Without a clear distinction between the two, answering questions like, "How do we prepare for scheduled preventative maintenance?", "Can we handle this sudden spike in demand?", or "Are we building enough inventory to support our busy season?" becomes a guessing game. When you're working off a vague cushion of stock, you're flying blind when it comes to aligning production with actual business needs.
For planners, cycle stock represents the inventory you expect to deplete based on demand in a regular replenishment cycle. Safety stock, on the other hand, is your insurance policy—it covers normal cause variation, whether it’s a supplier delay, a spike in demand, or any other unforeseen event. By treating them separately, planners can more precisely calculate how much inventory they need to cover both the expected (cycle) and the unexpected (safety) without overstocking and tying up too much cash in inventory.
Is Safety Stock Always Needed?
Plenty of businesses get by just fine without carrying safety stock. Consider industries that follow models like Make-to-Order (MTO), Configure-to-Order (CTO), or Engineer-to-Order (ETO). These acronyms describe businesses that make or assemble products when there’s an actual customer order. For them, holding safety stock might seem unnecessary.
But even these businesses may have safety stock. An MTO company might keep raw materials to cover unexpected orders or hedge against supply chain delays.
Some companies will use safety lead time. Instead of holding extra inventory to cover variability, they build extra lead time into their supply chain. That is a form of safety stock, even if they don’t call it that.
Bravely, you could decide to eschew all those approaches and stock only your average demand. The problem? You’d have stockouts half the time, as 50% of the cycles, your demand is above average (that’s how averages work, don’t hate me). What if you use your forecasted demand? Same problem. 50% of the time an unbiased forecast will come in under the actual demand (that’s how unbiased forecast error works). It’s less painful to use safety stock, trust me.
How IBP2 Can Help You Set the Right Safety Stock
At IBP2, we understand that every business is different. Whether you’re managing a just-in-time MTO model or balancing high-volume MTS operations, setting the right amount of safety stock can be tricky. Our process helps businesses analyze their supply chain variability, customer demand patterns, and service level goals to determine the ideal safety stock levels. Whether you’re managing raw materials, intermediates, or finished goods, we tailor our approach to meet your specific needs, minimizing excess inventory while ensuring you have enough buffer to handle the unexpected. With IBP2, you can confidently set your safety stock to balance risk and efficiency.
Footnote: I can think of an exception where safety stock has its own location. Have you used a two-bin inventory system? It’s an example of a pull or Kanban system where, when the first bin is emptied, the work center requests more inventory while they work through the second bin. That second bin contains extra inventory to cover any unexpected delays in refilling the first bin—an implicit safety stock system in action. Do you have other examples where cycle stock is physically separated from safety stock in a DC?
Comments