Managing Inventory and Safety Stock
This chapter documents procedures for planning safety stock inventory.
This chapter covers the following topics:
- Planning Safety Stock for Components and Co-products
- Defining and Generating Safety Stock Levels
- Safety Stock Inflation
- Safety Stock Smoothing
- Safety Stock Level Days of Supply
- User-Specified Safety Stock
Planning Safety Stock for Components and Co-products
You can get multiple assemblies when processing a component. Oracle Inventory Optimization considers the combined variability of such end items to calculate safety stock quantities for common components. This reduces the required safety stock levels.
You can specify the time-phased split for product ratios (co-products).
Oracle Inventory Optimization also calculates safety stock quantities based on statistically calculated demand variability for all nodes across the supply chain bill. Based on the independent demand probability distributions across the bill of distribution, the inventory planning engine generates appropriate levels of safety stock at different levels of supply chain bill.
Defining and Generating Safety Stock Levels
The following steps indicate the process of defining and generating safety stock levels for common components of independent end items along with their components across the supply chain bill:
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Define the bills of material in the Bills of Material form.
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In the case of multiple components, define the bill of materials for the item and the multiple components.
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Define the co-product and the split percentage in the Define Co-products form.
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Define the alternate split percentages for different time periods in the Define Co-product form.
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Collect the co-products definition to Oracle Advanced Supply Chain Planning.
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Plan safety stock levels for all eligible items.
Safety Stock Inflation
You might see varying safety stock requirements across the planning horizon owing to the following reasons:
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Compressed lead time: The demands in the beginning of the horizon have less lead time as compared to demands later in the horizon. As a result, you may see differing safety stocks across the horizon.
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Existing supply: If you have enough existing supply, you do not need safety stocks to cover uncertainty. As you start to consume existing supply, you need safety stocks later in the horizon. As a result, you may view varying safety stocks across the horizon.
Safety Stock Smoothing
Oracle Inventory Optimization calculates time phased safety stock values across the planning horizon. However, there may be frequent changes to the safety stock if the demand variability is high. You may prefer estimating safety stock that is stable across the planning horizon. Oracle Inventory Optimization enables you to hold a constant safety stock for a specified time in the planning horizon. If you do not want the inventory planning engine to recommend any change in the safety stock for a specific duration, you can indicate the number of days. Oracle Inventory Optimization ignores the negative on-hand when it calculates the safety stock. The inventory planning engine considers the negative on-hand as an independent demand due in the first bucket.
You can use the following plan level options in the Plan Options window to control the stability of the safety stock:
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Safety stock change interval (days)
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Safety stock change threshold interval (%)
For more information on these plan level options, see Plan Options Overview.
Consider an example. In the following illustration, the vertical axis represents the safety stock level while the horizontal axis represents the planning horizon. In this example, planning horizon is split into 4 quarters. The safety stock change threshold interval is set to 1%.
Safety Stock Change Threshold
The highest level of safety stock is indicated in the last change interval (Q4) at 115. The safety stock requirement in the adjacent interval is 95, which is lower than the requirement in Q4. This indicates that the safety stock quantity for Q3 needs to be reduced. As the safety stock change threshold interval is set to 1%, the inventory planning engine changes the safety stock levels at 113. The inventory planning engine reduces the stock from Q4 by a maximum of 1%. This amounts to 1.5, which leads to a reduction of 2 units. The inventory planning engine compares the safety stock requirements between the next adjacent quarters subsequently. In Q2, the safety stock required is 112. As 112 is within 1% of 113, the inventory planning engine does not change the safety stock levels. In Q1, the inventory planning engine recommends a reduction in the safety stock level by 1% of 112 (Q2).
Follow the steps provided to smoothen the safety stock:
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Review your inventory policy to determine the change interval.
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Divide the planning horizon into several equal sizes of change interval.
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Set the safety stock change interval in the Plan Options form.
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Determine the safety stock change threshold and specify the value in the Plan Options form.
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Run the plan and analyze the results.
Safety Stock Level Days of Supply
You can calculate your safety stock in terms of either absolute quantity or the days of supply. The days of supply refers to the number of days of demand that your safety stock can service. If you indicate the safety stock in terms of days of supply, you can compare inventory strategies across items (including groups of items) and plan accordingly.
The days of supply may include the inventory held to satisfy certain and uncertain demands. To calculate the days of supply, the inventory planning engine projects the safety stock value to the mean demand anticipated in future.
The following table displays buckets, the mean demand, and safety stock. Based on these values, the inventory optimization calculates the days of supply.
| Bucket | Mean Demand | Safety Stock | Days of Supply |
|---|---|---|---|
| 1 | 50 | 85 | 1.58 |
| 2 | 60 | 85 | 1.33 |
| 3 | 75 | 90 | 1.18 |
| 4 | 80 | 90 | 1.1 |
| 5 | 100 | 95 | 0.95 |
For example, on day 3, safety stock of 90 units is available. However, the mean demand is 75. The safety stock that remains after satisfying the mean demand is 15. This is used up against the mean demand on day 4. However, the mean demand on day 4 is 80. The inventory planning engine calculates the days of supply on day 3 as 1 + 15/80. This equals 1.18.
If you plan in weekly or monthly buckets, the inventory planning engine calculates the days of supply in terms of days.
You can view the days of supply for safety stock, target safety stock, and user-specified safety stock in the horizontal plan. When you view your horizontal material plan, you can review the days of supply. You can change the safety stock value in the Material horizontal plan. However, you cannot change the days of supply in the horizontal plan. You can increase the safety stock quantity to avoid stockouts. You can use the updated safety stock values in the supply plan to create supplies. For more information on the horizontal plan, see Overview of Viewing Output.
User-Specified Safety Stock
Several factors may influence your decision related to the level of safety stock that you need to maintain. These include:
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Contractual obligations
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Vendor-managed inventory
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Policies regarding service levels
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Subjective experience
The inventory planning engine recommends optimal levels of safety stock. However, you can override the recommendations that the inventory planning engine generates with your specific inputs.
You can use Oracle Inventory Optimization to specify a definite quantity for the safety stock in a time phased manner. Alternatively, you can specify the safety stock quantity in terms of days of supply. If you are uncertain about the definite safety stock quantity, you can specify the levels of inventory you want to maintain. The inventory planning engine validates the projected available balance against the inventory level that you specify.
If you enforce the level of safety stock based on your inputs, the inventory planning engine may need to violate constraints and other factors such as:
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Service levels
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Inventory postponement
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Budget and capacity
For example, you may have specified a budget constraint. If you enforce a certain level of safety stock that exceeds the budget limit, the inventory planning engine violates the budget constraint. Based on your specific safety stock requirements, you can estimate your budget and capacity requirements. In addition, you can calculate the planned service levels.
If you enforce user-specified safety stock, the inventory planning engine honors the user input and recommends the user-specified value rather than determining the optimal safety stock levels. To know the optimal safety stock levels, you can run a separate plan without enforcing user specified safety stock.
The user defined safety stock may violate the postponement suggestions that Oracle Inventory Optimization generates. Optimal inventory to be carried may be higher or lower than what the user would like to carry in some circumstances. In such a case, safety stock values with and without postponement may not follow any logic as they may be affected by the user-specified safety stocks. Any associated costs will also be skewed based on safety stock numbers. In addition, the inventory planning engine can ignore the safety stock smoothing, and the minimum and maximum levels of inventory if you enforce the user-defined safety stock.
You can set the postponement factor profile option (MSR: Postponement Factor) to control the safety stock levels in a supply chain. The value you set for postponement factor might conflict with the user-specified safety stock. For example, you may input a safety stock value for an item four levels down in the supply chain and set postponement factor to be two. This will be considered an invalid setup. If you define both, the postponement factor and the user-defined safety stock, the inventory planning engine ignores the user-defined safety stock and enforces the postponement factor.
Setting Up User-Specified Safety Stock
Follow these steps to specify the safety stock level you want the inventory planning engine to use:
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Determine the items for which you need to specify the safety stock. You can run collections to collect the safety stock from the source instance. Review the safety stock for the items in the Planner Workbench. You can drill down to the safety stock value from the Items window in the Planner Workbench.
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Override the existing safety stock value with the value you want in the Safety Stock window (Planner Workbench). You can enter either an absolute quantity for the safety stock or the days of supply. If you enter the user-specified safety stock in terms of days of supply, the inventory planning engine converts the days of supply to a quantity based on the average demand quantity. When you enforce the user-specified safety stock, the inventory planning engine enforces the quantity calculated based on the average demand quantity. The enforced safety stock quantity may be different from the safety stock expressed in terms of the days of supply. Days of supply can be input to or output from the inventory planning engine. It is an input when you, as a user, specify the number of days you want the inventory to last. It is an output when the inventory planning engine expresses the optimal safety stock value in terms of days of supply. The input quantity specified as part of user specified safety stocks may not match the days of supply specified by the engine as the days of supply calculation is based on different statement of demands.
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Alternatively, you can set up the minimum or maximum inventory levels in the Inventory Levels window. If you provide an absolute quantity and the inventory level, the inventory planning engine considers the absolute quantity.
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Enforce the target safety stock by selecting the Enforce Target Safety Stocks check box in the Plan Options window.
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Run and evaluate the plan.
Viewing the User-Specified Safety Stock
You can view the user-specified safety stock in the horizontal plan (Planner Workbench). User-specified safety stocks are expressed in terms of units, days of supply, and value. If you specified the minimum or maximum inventory levels, the horizontal plan displays the values for the same.
For more information on viewing safety stock levels, see Safety Stock and Target Safety Stock.
Analyze the Impact of User-Specified Safety Stock
You can use the Analysis Workbench to analyze the impact of user-specified safety stock values on the existing budget, capacity, and inventory postponement. For more information on the analysis views, see Analyzing Inventory Plans.