Accounting Best Practices, Fifth Edition

16–40. Use Variable Safety Stocks for Fluctuating Demand

Most materials planning systems include a feature that calculates an adequate safety stock level based on parts usage levels and supplier lead times. If a company experiences a steady level of demand, this approach will yield reliable safety stocks. However, what if demand fluctuates to a high degree, as is the case for seasonal sales? When this occurs, safety stocks calculated during a low-demand period will result in repeated stockouts, while safety stocks calculated during a high-demand period will result in an excessive inventory investment. Even the midway approach of using a safety stock level based on the average level of demand satisfies no one—still some stockouts during high-usage periods, and still too much inventory during low-usage periods.

The solution is to obtain materials planning software that allows for variable safety stocks. These systems automatically reset safety stock levels as forecasted demand levels change, so the conflicting objectives of minimal stockouts and minimal inventory levels are both balanced. If the existing system does not contain this feature, the software development staff may be able to program it into the existing system.

A low-budget approach is to schedule a quarterly review of safety stocks, focusing on those impacting the largest dollar value of inventory, and manually adjust safety stocks at that time. Since the materials management staff rarely has time for such a review, ...