BusinessHABZion Oil and Gas Stock Price
Zion Oil and Gas Stock Price: Safety stock, or buffer stock, is the amount of extra inventory you need to keep avoid a shortfall of materials.
It is important to calculate your safety stock carefully because while too little stock will result in shortages.
Too much stock will inflate your inventory costs.
Luckily, there are ways to determine how much safety stock you will need on hand.
Do you have any well-written article you would like to publish on BusinessHab? You can request publication of your article for publication by sending it to us via our Email below. Do You Have any information to share with us? Do well to contact us on Email below.
Determining Safety Stock from Demand
Look to historic demand and demand variability to determine how to avoid stock outs.
The following calculations will predict the stock necessary to achieve a certain cycle service level – i.e. the percentage of supply cycles that will result in a stock out.
Determine average demand.
Average demand is the total quantity of a material or goods required each day over a fixed period.
A common approach is to check the total usage of that item for a specified period.
Such as one calendar month or the interval between ordering and delivery of stock.
And then divide by the days in that month to find usage per day.
For many items — such as long-established brands in a grocery store.
Historical demand will provide the best guide to calculating demand.
Zion Oil and Gas Stock Price
Consider future demand for particular stock items.
Sometimes it makes more sense to consider future demand.
For instance, if you manufacture car transmissions and have received a large order.
You will want to factor that order into demand.
In this case, you might consider calculating average demand and then adding in the demand created by the large order
Calculate demand variability.
Average demand can only tell you so much. If demand fluctuates dramatically from month to month or day to day.
You will need to include that in your calculations.
So that you will have enough stock to cover surges in demand.
Start by using a spreadsheet to calculate the standard deviation in demand (in Excel, enter all demand figures in their own cells, then the formula is = STDEV(the cells in question)).
Or use the following formula:
- Start with the average demand over a period of time (i.e. a week, month or year).
- For our example, let’s say it is 20 units per month.
- Determine the absolute difference between each data point and the average.
- For example, if monthly demand was 8, 28, 13, 7, 15, 25, 17, 33, 40, 9, 11, and 34 units, the differences from 20 would be: 12, 8, 7, 13, 5, 5, 3, 13, 20, 11, 9, and 14.
- Square each difference. In our example, this would yield: 144, 64, 49, 169, 25, 25, 9, 169, 400, 121, 81, and 196.
- Calculate the average of the squares. E.g. 121
- Take the square root of the average. This is your standard deviation of demand. E.g. 11
Zion Oil and Gas Stock Price
Determine your service factors, aka Z-scores.
The service factor, or Z-score, is based on the standard deviation of demand.
A Z-score of 1 will protect you from 1 standard deviation of demand.
So in our example, since the standard deviation of demand was 11, it would take 11 units of safety stock in addition to normal stock to protect against one standard deviation, yielding a Z-score of 1. 22 units of safety stock would yield a Z-score of 2.
Decide on the Z-score you are looking for.
The higher your Z-score, the less likely you are to have a stock-out.
In choosing a Z-score, you will want to balance customer service and inventory costs.
You will want a higher Z-score for stocked units with greater value to your business.
A Z-score of 1.65, satisfying demand with a 95% confidence level, is generally regarded as acceptable even for important stock.
In this case, that would mean stocking approximately 18 units (the standard deviation of 11 x 1.65) of safety stock, or 38 units total (average demand + safety stock).
Here are how Z-scores relate to the probability you can fulfill demand:
- Z-Score of 1 = 84%
- Z-Score of 1.28 = 90%
- Z-Score of 1.65 = 95%
- Z-Score of 2.33 = 99%
Accounting for Lead Time
Factor in lead time to account for supply variability.
The lead time is the time from when you decide to produce.
Or order an item until the time at which the item is on hand and ready for sale to the end customer.
There are several factors that can cause the lead time to vary:
- Production delays — If your own production process is variable, this may impact the lead time. In addition, the production process of the products you are ordering may vary.
- Material defects — If you order 10 units and 2 are defective, you will have to wait for the additional 2 units.
- Delivery delays — Shipping times can be expected to vary slightly at the best of times, and unexpected events like natural disasters or strikes can further delay delivery.
Zion Oil and Gas Stock Price
Sync your stock with your supply delivery cycle.
To do so, you will need to adjust your standard deviation of demand to match the lead time period. Multiply your standard deviation of demand (calculated in Part I, step 4) by the square root of the lead time.
- This means if you calculate standard deviation on a monthly basis, and lead time was 2 months, you would multiply the standard deviation by the square root of two.
- Using our previous example, this means: 11 x √2 = 15.56.
- Make sure to convert lead time to the same unit of time measure that you used to determine standard deviation of demand. For example, if you calculated standard deviation on a monthly basis and lead time was 10 days, you would want to convert lead time to .329 months — i.e. 10 divided by 30.42 (the average days in a month).
Put it all together.
We can combine formulas to determine safety stock based on demand with lead time factored in as follows:
- Safety stock = Z-score x √lead time x standard deviation of demand
- In our example, to avoid stockouts 95% of the time, you would thus need 1.65 (the Z-score) x √2 (lead time) x 11 (standard deviation of demand) = 25.67 units of safety stock.
Zion Oil and Gas Stock Price
Calculate safety stock differently if the lead time is the primary variable.
In this case, the formula will be:
- Safety stock = Z-score x standard deviation of lead time x average demand
- For example, if aiming for a Z-score of 1.65, with average demand constant at 20 units per month, and lead times over a six month period being 2, 1.5, 2.3, 1.9, 2.1, and 2.8 months, then Safety Stock = 1.65 x .43 x 20 = 14.3 units.
Use a third equation to account for independent variation in both lead time and demand.
Then safety stock is the Z-score multiplied by the square root of the sum of the squares of demand and supply variability, or:
- Safety stock = Z-score x √[(lead time x standard deviation of demand squared) + (standard deviation of lead time squared x average demand squared)]
- In our example: safety stock = 1.65 x √[(2 x 11squared) + (.43 x 20)squared] = 29.3 units.
Sum the calculations based on lead time and demand variability if the two factors vary dependently.
That is, if the same factors impact leads time and demand variability.
You will need to sum the individual safety stock calculations in order to assure yourself of adequate safety stock. In this case:
- Safety stock = (Z-score x √lead time x standard deviation of demand) + (Z-score x standard deviation of lead time x average demand)
- In our example: safety stock = 25.67 + 14.3 = 39.97 units.
Reducing the Need for Safety Stock
Reduce the amount of safety stock you need to save money.
Having too much stock on hand will increase inventory costs.
So it is ideal to run a lean supply chain.
Remember: the goal is not to prevent all stockouts, but to balance customer service goals and inventory costs.
Monitor your use of safety stock.
Is the model performing as expected? If so, you should be using safety stock in about half of your supply cycles.
If you are using safety stock less, you may be able to cut back on how much you hold.
Decrease variability in demand.
Demand tends to vary more than lead time and has a much greater impact on the safety stock equation.
Smoothing out demand variability will allow you to hold less safety stock.
Demand can be shaped through adjusting price, lead time, or the content of the products being produced.
Work to reduce lead time.
If lead time were zero, then you would need no safety stock.
As the product could be produced instantly upon demand.
Of course, lead time can never be reduced to zero.
But lowering it as much as possible is the best way to run a leaner business.
This means both tightening your supply chains and your production processes.
Zion Oil and Gas Stock Price
Shift customer service targets.
Implement an order-expediting process.
Consider shifting to a make-to-order (MTO) or finish-to-order (FTO) production process.
Then MTO will allow you to eliminate most safety stock, while FTO will allow for less differentiation in safety stock versus carrying finished inventory.
Zion Oil and Gas Stock Price
More tips
-
There are several other methods to calculate safety stock, but all are based upon using standard deviations to determine demand and lead time variability.
-
Be sure you understand the formula you are using and check to make sure it is working properly.
-
If you go three or four months without dipping into safety stock.
-
Or conversely, if you have two or more stockouts in a six-month period.
-
Then you should re-evaluate the amount of safety stock you carry.
BusinessHAB