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Safety Stock

In: Demand Forecasting for Inventory Control

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  • Nick T. Thomopoulos

    (Illinois Institute of Technology)

Abstract

Safety stock is the extra inventory to hold for an item for protection against demands exceeding the forecast. This type of stock concerns entities where the demands of the future are not known until they happen, like in distribution centers, stores and dealers. In plants, where the production schedules are set in advance, safety stock is usually not needed. The typical way to measure the variability in the forecasts is by the standard deviation of the one month ahead forecast error. A relative measure is the coefficient of variation. Two common methods of generating the safety stock are: the service level (probability not out of stock), and the percent fill (ratio of demand filled over total demand) methods. Both methods are also sometimes referred as the service level method. The normal distribution is used primarily to generate how much safety stock to have available. This chapter shows how the truncated normal distribution can also serve this function. The truncated normal has many shapes and includes only portions of the right-hand-side of the standard normal.

Suggested Citation

  • Nick T. Thomopoulos, 2015. "Safety Stock," Springer Books, in: Demand Forecasting for Inventory Control, edition 127, chapter 11, pages 149-163, Springer.
    • Handle: RePEc:spr:sprchp:978-3-319-11976-2_11
    DOI: 10.1007/978-3-319-11976-2_11
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