Safety stock crack the code5/1/2023 ![]() ![]() Where the Z-Score is an inverse distribution function of a standard normal distribution, µ L is the average lead time, µ D is the average demand per each unit period, σ D is the standard deviation of demand, and σ L is the standard deviation of lead time. If the demand rate and lead time vary independently, i.e., they are independent variables, the formula to calculate safety stock is as follows, In real life, however, both the demand rate and lead time could vary, so more complicated approaches should be used to calculate safety stock. If the demand rate is constant but the lead time is variable, the following formula can be used: If the lead time is constant but the demand rate is variable, the following formula can be used: If the rate of demand or lead time is constant, a quite simple approach can be used. There are several ways to calculate safety stock level. Thus, the amount of safety stock is always a trade-off between the risk of running out and carrying cost. The disadvantage of holding safety stock is an increase in carrying cost that can greatly affect business profit, and if the amount of safety stock is insufficient, a loss in sales could occur. ![]() In other words, it is an extra quantity of stock that can be used as a buffer to cover a higher demand rate until the next order arrives or if the delivery date shifts forward. ![]() A company holds safety stock to mitigate the risk of running out of stock due to an unexpected increase in demand rate and/or lead time. ![]()
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