Safety Stock: A Trojan Horse?

by Dave Garwood

The folks at Fast Track Manufacturing are struggling with a bunch of familiar frustrations. Business is good. They can sell it, but can't ship it. Seems like they are always missing something when they try to make a product. As one old hand remarked, "We've got most of the parts for all of the products, but we don't have all of the parts for any of them!"

The main topic at the production meeting is what to do! The conclusion: increase safety stock, i.e., more buffer inventory! "If we increase safety stock, the extra inventory will buffer us from demand and supply "surprises," is the rationale. Sounds logical at first glance. But it's the wrong solution in most cases.

Material may be missing when needed for a long list of reasons. The root causes could be demand issues -- sold or used more than planned, for example. The root causes could be supply issues -- plant or supplier didn't deliver on time. Let's look deeper into the supply failures.
Increase Safety Stock and Increase Shortages? Maybe!

One product line, Small WizBangs, comes in many "flavors" -- left hand, right hand, with and without, etc. The catalog has 100 different models or SKUs. Fast Track planned to produce a total of 500 Small WizBangs in each of the last four months. They were confident they had adequate capacity and this would meet the sales forecast. Sales sold close to 500 each month. However, here are the actual production numbers (all numbers are adjusted for working days per month) ...

Do they currently have enough capacity to make 500? The answer is no. Could they make more than historically done? Possibly, but not unless they do something significantly different in the supply chain to increase capacity. Somewhere down the supply chain is a constraint. It could be inside their plant or with a supplier. Until that constraint is found and removed by working more hours, adding people, getting new suppliers, increasing productivity, improving yields, etc., the actual production (demonstrated capacity) will most likely continue to be around 450 each month. And increasing the planned safety stock will not increase capacity. In fact, if the planned safety stock is increased, they will plan to make more than 500 to try to increase inventory! This will make the problem worse! Here's why ...

Safety stock (safety stock stated in pieces or safety time stated in days) affects the timing of when the next supply is scheduled to be done. As safety stock for an item is increased, the planning system moves a future supply plan into an earlier time period, increasing the current month's capacity requirement. Increasing the planned safety stock will cause Fast Track to try to make everything already scheduled (a total of 500) to meet demand -- plus more! They have not yet been capable of making the 500 they scheduled.

Let's assume if they scheduled enough of each product to only meet actual customer order demand (sold orders), they would need to make 125 units. If they scheduled enough to meet just forecasted orders, they would need to make an additional 275, or a total of 400. If the capacity is 450, how many can they make "early," i.e. to build safety stock? The answer is only 50. Any units made above 50 will steal capacity from customer orders or forecasted orders. Not good! The amount of safety stock Fast Track can "afford" is a function of capacity left over after taking care of known or anticipated customer orders. This might be Fast Track's safety stock constraint, not money.

This same scenario applies if we were looking at one cell or work center in the plant or one supplier that produces a variety of parts or items and safety stock is planned at the part level. In this case, the plan of 500 might be in equivalent capacity units such as standard hours. Demands for parts come from the product master schedules. The supply plans are schedules to make parts. All else remains the same. If the product is made with many parts supplied simultaneously, the impact may be even more severe.

Beware of the Trojan Horse!
Safety stock or safety time may be necessary and beneficial if strategically planned for the right reasons. It is more often misunderstood, deceptive and disastrous! When the safety stock parameter (pieces, days or level for kanban signal) is increased in a planning system, additional material or product does not automatically pop up in the warehouse, nor is there a padlocked box in the warehouse with this "minimum" inventory. It takes more capacity in the supply chain to make more and, thus, increase buffer inventory or safety stock. It takes valid schedules, due dates (or rate) that are real need dates and meeting them 100% on time to insure the right items are produced. More planned safety stock will not overcome either of these root causes of shortages -- lack of capacity or invalid schedules.

Beware of increasing safety stock. It just may be a Trojan horse!