How do you determine the optimal level of safety stock and buffer capacity in your Capacity Planning process?

3 How to adjust safety stock and buffer capacity?

Safety stock and buffer capacity are not static values that should be set and forgotten, but rather need to be adjusted periodically based on changes in demand patterns, lead times, service levels, and cost factors. These factors can include demand variability, lead time variability, service level target, inventory holding cost, and capacity utilization cost. For instance, if demand becomes more volatile or unpredictable, you may need to increase safety stock or buffer capacity to maintain service level. Similarly, if you want to increase your service level, you may need to increase your safety stock or buffer capacity. On the other hand, if inventory holding cost increases, you may want to reduce your safety stock or buffer capacity to lower total cost of ownership. Additionally, if capacity utilization cost increases, you may want to reduce your buffer capacity to optimize production efficiency. Overall, the goal is to find a balance between customer satisfaction and total cost of ownership.

4 How to monitor safety stock and buffer capacity performance?

To ensure that your safety stock and buffer capacity levels are optimal and effective, you need to monitor their performance regularly and compare them with your actual demand and output data. To measure their performance, you can use key performance indicators (KPIs) such as stockout rate, fill rate, backorder rate, on-time delivery rate, inventory turnover ratio, and capacity utilization ratio. These KPIs will help you determine the percentage of orders that cannot be fulfilled due to insufficient inventory, the percentage of orders that can be fulfilled from the available inventory, the percentage of orders that are delayed due to insufficient inventory, the percentage of orders that are delivered within the agreed time frame, the number of times that your inventory is sold or used in a given period, and the percentage of your production capacity that is actually used in a given period.

5 How to improve safety stock and buffer capacity management?

Safety stock and buffer capacity management is not only about calculating and adjusting the optimal levels of inventory and capacity, but also improving the accuracy and reliability of your demand forecast, lead time, and supply availability. To do this, you should use historical data and statistical methods to generate an accurate demand forecast that reflects seasonality, trends, and patterns. Additionally, reliable and consistent data sources should be used to estimate lead times. Advanced tools such as simulation, optimization, and scenario analysis can also be used to compare different safety stock and buffer capacity levels and their impacts on cost and service performance. Collaborative and integrated approaches such as S&OP and SCM should be used to align demand and supply plans across different functions and partners. Lastly, control charts, dashboards, and audits can be used to monitor performance and identify any gaps or opportunities for improvement.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?