![]() ![]() ![]() A company's inventory of raw materials or finished items is retained in the normal operating cycle-raw materials any resources required to produce finished items. Inventory is a critical asset for any company. Inventory is a significant source in all the balance sheets concerning every business. With the availability of stocks, both manufacturers and wholesalers/businesses can contribute to selling or producing things. The process of numbering or cataloguing objects is called "inventory." Inventory is a valuable collection of assets in accounts and pertains to the various manufacturing levels. Inventory management is done to make sure and check if a business has adequate merchandise in hand and to recognise a shortfall. Safety stock is also known as reserve inventory or buffer stock.Inventory management refers to tracking commodities, essential materials, and raw ingredients that a corporation consumes or distributes. In short, it can be quite difficult to optimize the precise level of safety stock at which a company's customers are least unhappy, while also minimizing the investment in inventory. However, doing so can annoy customers if the result is stockout conditions when customers want to make a purchase. When this is the case, a well-run business will constantly monitor its inventory levels and sell off excess stocks within a short period of time. This can be a major concern when inventory has a short shelf life, perhaps due to fashion trends or because it spoils within a short period of time. Having too much safety stock can result in many holding costs, such as the costs of obsolescence, inventory storage, interest expense, and spoilage. Safety stock can also be reduced when there are similar items in stock, toward which the customer service staff can direct customers. For example, if an adequate safety stock level is considered to be $100,000 in order to maintain a 99% fulfillment rate, versus just $10,000 to maintain a 95% fulfillment rate, management may choose the lower inventory investment. When to Reduce Safety StockĪ company may elect to reduce or eliminate safety stock levels in cases where there is little customer demand, customers are indifferent if deliveries are delayed, or where it is too expensive to maintain an adequate safety stock level. Both situations tend to result in an excessive investment in safety stock. Conversely, if the fixed level results in a stockout condition, then there will be pressure to set it higher. The reason is that a high safety stock level will not result in any stockout conditions, so there is no management pressure to set the level lower. The usual outcome of this approach is that inventory levels tend to be too high. In some cases, this fixed amount could even be set at zero, in cases where demand variability is minimal. ![]() This amount is not changed unless an event occurs that convinces the materials management staff to alter it. Rather than using the preceding safety stock formula, an alternative approach is to simply set a fixed safety stock amount. ![]() This can require a substantial safety stock if there are ongoing problems with the upstream production process. (Maximum daily usage - Average daily usage) x Lead time = Safety stockĬonstraint analysis holds that the only safety stock that matters in a manufacturing environment is the inventory buffer located directly in front of the bottleneck operation this buffer should be sufficiently large to ensure that no variations in the production process upstream from the bottleneck operation interfere with the bottleneck. Pareto analysis can be employed to revise safety stock levels on a more frequent basis for only the most heavily-used inventory items. However, this can be an expensive and time-consuming approach, so it is more common to set a fixed safety stock level, and review the adequacy of this level from time to time. It is possible to fine-tune the level of safety stock needed, based on a statistical analysis of historical demand records and future demand estimates. Higher safety stocks may be warranted during periods of supply restrictions, to guard against missing or short supplier deliveries. Safety stock does not just involve finished goods it can also be applied to raw materials, to guard against delays in the delivery of materials from suppliers. This inventory is maintained so that a company has sufficient units on hand to meet unexpected customer and production demand. Safety stock is excess inventory that acts as a buffer between forecasted and actual demand levels. ![]()
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