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ISSN : 2456-3676

Title:
SAFETY STOCKS: ARBITRARY VERSUS STATISTICAL METHOD

Authors:
Anthony Vaz and Shaheen Mansori, Malaysia

Abstract:
To manage fluctuation in demand, organizations usually set safety stocks of finished goods to help buffer fluctuating demand as it arrives from the market. Sometimes called buffer stocks, safety stock inventory is a term used by Supply Chain Managers to describe extra stock that is kept to cover late supplier deliveries and even fluctuating demand. This study looks at determining safety stocks using a statistical approach of determining demand variability to see whether any savings can be made in days of finished goods inventory held. Comparisons between the trial and error approaches versus statistically driven safety stocks using probability and the standard deviation of historical demand will be used to compare the days target of inventory versus actual inventory held for a single organization with multiple warehouses for a fast moving consumer goods business. The findings show that days of inventory can be substantially saved using the statistical approach. In addition, this study will also help Supply Chain Managers to understand sources of demand variation and help them try to minimize the variation before attempting to determine statistically calculated safety stocks in an attempt to reduce costs associated with holding inventory.

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