Calculating the Safety Stock and the Reorder Level

If a warehouse that stores article has to be ready for delivery at all times, then there has to be a high level of safety stock in this warehouse, as forecasting error cannot always be ruled out. This would also entail a high level of warehousing costs. The level of safety stock depends on the service level you select, on the replenishment lead time and on the accuracy of the forecast.

In order to keep the safety stock and therefore the storage costs as low as possible, the RP controller usually specifies a service level for each article. From a mathematical point of view, the service level represents an organization's ability to avoid a shortfall occurring during replenishment lead time.

If you opt for a relatively high service level, then the safety stock level calculated by the system will also be high. If you opt for a low service level, then the safety stock level will also be low.

The replenishment lead time refers to the in-house production time for in-house production and the planned delivery time for external procurement. It represents the time between the initiation of a procurement procedure and transferring the article into the warehouse. The replenishment lead time is stored at site level in the article master record by the RP controller. Since the probability of a shortfall is higher in a longer period, the safety stock level must also be set higher for long replenishment lead times.

Finally, the safety stock level also depends on the accuracy of the forecast . If the forecast deviates greatly from the actual consumption values, then the safety stock level will also be unusually high.

In addition to the safety stock level, the system recalculates the reorder level for articles which are subject to automatic reorder level adjustment. The reorder level is the sum of the safety stock and the forecast requirement within the replenishment lead time or the overall lead time for articles produced in-house.

The system compares "static" availability during article withdrawal; that is current availability, without taking future requirements into consideration, with the reorder level. In other words, it compares the remaining stock with the reorder level. If remaining stock falls below the reorder level, then the system marks the article for the planning run by making an entry in the planning file. During the next planning run, the system automatically generates a purchase requisition or a planned order for the article.

You can find a list of the various formulae for calculating the safety stock level and the reorder level in Overview