Factors Affecting the Level of Safety Inventory

The appropriate level of safety inventory is determined by the following two factors  

As the uncertainty of supply or demand grows, the required level of safety inventories increases. Demand for milk at a supermarket is quite predictable. As a result, supermarkets can operate with low levels of safety inventory relative to demand. In contrast, d and for spices at the same supermarket is much harder to predict. Thus the supermarket needs to carry high levels of safety inventory for spices relative to d and. Whereas most of the milk inventory at a supermarket is cycle inventory (with very little being safety inventory), most of the spice inventory is safety inventory carried to deal with uncertainty of demand. 

As the desired level of product availability increases, the required level of safety inventory also increases. If the supermarket targets a higher level of product availability for a certain spice, it must carry a higher level of safety inventory for that spice. 

As discussed in Chapter 7, demand has a systematic as well as a random component. The random component is a measure of demand uncertainty. The goal of forecasting is to predict the systematic component and estimate the random component. The random component is usually estimated as the standard deviation of forecast error. We illustrate our ideas using uncertain demand for a smartphone at B M Office Supplies as the context. We assume that periodic demand for the phone at B M is normally distributed with the following inputs  

Even though standard deviation of demand is not necessarily the same as forecast error, we treat the two to be interchangeable in our discussion. Safety inventory calculations should really be based on forecast error. 

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