The received safety stock value is used to modify the existing inventory policy or create a new one that will eliminate the products to be lost or delayed. Let us see how it works.

The image below shows a simple example of a DC inventory
within our supply
chain. and the way it changes over time:

The Inventory minus backlog
stays less than *0* for a significant period of time,
that is why we need certain safety stock to be able to provide the
required service level.

Estimating safety stock value

- ALX adds some excess safety stock value to the initial
stock, the reorder point and the “reorder up to” quantity and runs the
simulation. The excess safety stock is just a number, which is
knowingly large enough to avoid inventory stock outs. The exact value
does not matter. This gives us the following dynamics:

In the current simple example, the shape of the actual inventory behavior chart has not changed, but it changes in most cases if no stock outs happen, because all orders in this case are sent immediately and do not spend any time waiting for products.

The inventory behavior is based on two processes:

- orders coming from downstream objects decrease inventory
- replenishment shipments arriving from upstream objects increase inventory

Though it may look smooth from the whole simulation duration perspective, it is a step function by nature, i.e. all changes happen in particular moments of time. It actually looks like this:

- Let us denote each new inventory value after an order is
sent as
*I1, I2, .. In*(see the figure above) where*n*is the total number of orders.

Assume we want to keep the service level measured by product units equal to 95%. Let us denote the total sum of orders as*S*. - Our goal is to find the
*Auxiliary value*(AV), which will be the smallest number satisfying the condition, where the sum of all orders (leading to inventory dropping below the AV) is greater than or equal to*5%*of*S*. To do that we order increasingly*{I1, .. In} i*.

Assume we get an arranged set

*{J1, .. Jn}*where a previous element is less than or equal to the next one. Then we will take an order corresponding to*J1*, and assume that its amount of product units is equal to*O_j1*. If*O_j1 > 0.05*S*, then*J1*is the necessary value. If it is not, the next*J2*value must be taken with the corresponding*O_j2*order size to test if*O_j1 + O_j2 > 0.05*S*. If the condition is met, the*J2*is what we need. - This calculation must be repeated until the
necessary value is found or
*Jn*is reached. In the latter case Jn is the necessary value.The auxiliary value corresponds to the expected level of*0*, which wil allow us to reach the required service level. Having found the AV, we may calculate the required safety stock value:

safety stock = max(0,excess safety stock - auxiliary value)

Related topics

Safety Stock Estimation Experiment