The following are examples of safety stock calculations.
#1 - Average – Max Method
The calculation of safety stock is -
buffer stock formula = (Max Lead Time * Max Sale) - (Average Lead Time * Average Daily Sale)
Max Lead Time = As can be seen from the sheet, the maximum lead time taken was in January with 15 days.
Max Sale = The month of December had the maximum number of sales.
- Calculating maximum sales in day = 1400/30 = 46. 03
- Average Lead Time = 11
- Average Daily Sale = 33.70
Putting the numbers in the formula, we get the following -
Safety Stock = (15 * 46.03) – (11 * 33.70) = 319.73 ≈ 320 Units
The calculation of the reorder point will be -
Reorder Point = 319.73 + 33.70 * 11 = 690.41 ≈ 690 Units
This formula is not very effective if the range of variability of sales volume or lead time is too large.
# 2 - King’s Method
The formula makes use of service level and normal distribution of data. Z represents the service level. Service level defines the expected probability of avoiding an out-of-stock problem before restocking the supplies. A 95% service level means that there may be a stockout in 5% of the cases. A high service level increases the business’s cost to avoid stockout, but many firms do it nonetheless.
The calculation of buffer stock based on King's Formula is described below.
Buffer Stock = Z * sqrt {(Average Lead Time * (Standard Deviation in Demand) ² + (Average Sale * Lead Time Standard Deviation) ²}
1.28 * SQRT ((0.36 * 209.44^2) + (1025 * 0.09) ^2) = 197.34 ≈ 197 Units
Please note, we have used monthly lead time here in consideration of the monthly sales report.
Reorder Point
The calculation of the Reorder point will be -
Reorder Point = 197.03 + 33.70 * 11 = 568.03 ≈ 568 Units