{"id":23012,"date":"2019-10-04T08:41:21","date_gmt":"2019-10-04T12:41:21","guid":{"rendered":"https:\/\/planningposts.com\/?p=23012"},"modified":"2025-09-15T19:18:52","modified_gmt":"2025-09-15T23:18:52","slug":"service-level-management-4th-essential-step-to-expert-demand-planning","status":"publish","type":"post","link":"https:\/\/blueridgeglobal.com\/blog\/service-level-management-4th-essential-step-to-expert-demand-planning\/","title":{"rendered":"Service Level Management: 4th Essential Step to Expert Demand Planning"},"content":{"rendered":"

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Wouldn’t it be nice if calculating safety stock wasn’t such a crap shoot? The biggest conundrum in demand planning is Service Level Management and how to calculate safety stock so that the company can meet its service level goals — without sabotaging margins, that is.\u00a0<\/span>That’s the topic of today’s post from our ‘7 Essential Steps’ series. <\/span><\/p>\n

In case you were sleeping, we’ve already gone through\u00a0Demand Forecasting<\/a>, Lead Time Forecasting<\/a> and Order Cycle Optimization<\/a>. Here in Step #4,\u00a0<\/span>we’ll share some proven Service Level Management strategies that will help bring greater accuracy to your demand forecasts, so you can hit the highest service level goals possible for your company’s investment.<\/span><\/p>\n

Getting Real with Safety Stock Calculations<\/h3>\n

Buffer stock<\/em>, extra stock<\/em>, C.Y.A. stock<\/em>\u2026 even overstock<\/em> are names fondly given to Safety Stock<\/strong>. And to a certain extent, each name describes safety stock fairly accurately. Each name conveys the fact that extra on-hand inventory is involved. However, none of the terms adequately describe what the extra inventory is for, with the exception of C.Y.A. Stock, of course. But even C.Y.A. stock misses the whole point of investing in extra inventory. SAFELY.<\/p>\n

No Demand Forecast is Perfect<\/h3>\n

Let’s just clear the air right up front. To think you can have zero safety\u00a0stock is Fantasy Land.<\/p>\n

When we speak of safety stock, we often talk in terms of \u201cinventory needed to protect the service level goal,\u201d or \u201ca level of extra stock that is maintained to mitigate risk of stockouts.\u201d This description isn\u2019t wrong, but it doesn\u2019t convey the real purpose of safety stock. Until some genius (we\u2019ve got a couple of them here\u2026 and they say they are close!) develops what we like to call the \u201cCrystal Ball\u201d demand forecasting algorithm, at least some amount of safety stock is going to be needed to protect against the error that exists with demand forecasting.<\/p>\n

I hate to be the bearer of bad news, but while some forecasting algorithms are better than others in certain circumstances, none are 100% correct every single time. It is those forecasting errors which we need to account for.<\/p>\n

Supply Chain Planning for Inventory Control<\/h3>\n

One of the best ways to account for forecast error is obviously to have a demand planning process<\/a> by which the forecast is maintained regularly, applying seasonal profiles when needed, and making proper adjustments when called for. Supply chain planning (SCP) algorithms have the power to calculate a safe amount of inventory to protect against the inherent forecast error you face every day.<\/p>\n

Because inventory control<\/em> is always an initiative, and options exist in SCA to \u2018control\u2019 safety stock (manual safety stock, safety stock min., safety stock max.), many demand planners will ask: \u201cShould I change the safety stock quantities in SCP?\u201d<\/p>\n

Inventory planners should understand that the options are there because every environment is different, and there is always an item or two that defies typical best-practice principles. But in general the answer is \u2018No\u2019. Safety stock is one of the heaviest, most complicated calculations in the system. And it should be recalculated every day.<\/p>\n

\"cloud-native-solutions-demand-forecasting\"<\/a>

Learn about cloud-native solutions for demand forecasting<\/p><\/div>\n

5 Safety Stock Calculations that Count<\/h3>\n

If a demand planner feels that too much is being carried in terms of safety stock, demand forecasting technology<\/a> can be used to optimize the following 5 components of calculating safety stock:<\/p>\n

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  1. Demand Forecast <\/strong>(demand velocity) \u2013 is the forecast correct? Too high a forecast will drive up safety stock!<\/li>\n<\/ol>\n
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    1. Standard Deviation<\/strong> (a measurement of forecast error). This is one of the main drivers of safety stock. The greater the deviation, the greater the need for safety stock. You may not feel like you can control this component much. However, what you can do is use technology to find seasonal tendencies and unfiltered promotional demand. Here are some key tips to follow here:<\/li>\n<\/ol>\n