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Safety Stock Calculation

There are two main inventory management systems: P systems which replenish stock levels by keeping quantity constant and allowing period to vary, and Q systems which replenish by keeping period constant and allowing quantity to vary. Safety stock levels are calculated based on factors like forecast accuracy, lead times, and range of coverage, with the goal of ensuring sufficient stock to meet customer demand despite delays or forecast errors. SAP allows automatic calculation of standard or dynamic safety stock levels based on historical demand data and coverage profiles.

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232 views4 pages

Safety Stock Calculation

There are two main inventory management systems: P systems which replenish stock levels by keeping quantity constant and allowing period to vary, and Q systems which replenish by keeping period constant and allowing quantity to vary. Safety stock levels are calculated based on factors like forecast accuracy, lead times, and range of coverage, with the goal of ensuring sufficient stock to meet customer demand despite delays or forecast errors. SAP allows automatic calculation of standard or dynamic safety stock levels based on historical demand data and coverage profiles.

Uploaded by

sksk1911
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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In normal materials management there are basically 2 basic inventory management systems, the

P system and the Q system. 

P system is a system wherein replenishment is done keeping the quantity constant. The period
becomes the variant. In other words you fix the quantity you want the stock to dip, to trigger a
requirement. As soon as the stock level is reached you replenish the stock. During a lean period
the time taken to reach the level will be longer and during an active period the time taken to reach
that stock could drop.This normally relates with your consumption based planning. 

Q system is a system wherein replenishment is done keeping the period constant. The quantity
becomes the variant. In other words you will check for the level of stock at fixed time intervals
(daily, weekly, monthly etc.) compare it with the requirements on that day and trigger the
procurement process for replenishment.This normally relates with your MRP.

Now there are 4 more factors that could affect the idealistic procurement pattern:  
1. Ordering Lead-time.  
2. Manufacuring Lead-time  
3. Transporting Lead-time  
4. Stock conversion Lead-time (or Quality Inspection lead time) 

A delay in any or all of the above can have effect on the entire replenishment process and the
stock. A buffer stock must be designed to take into account the above coverage. Again the
determination of your safety stock depends on the accuracy of your forecast. Higher your
accuracy, lower your safety stock. This relationship between forecast accuracy and service level  
is denoted by factor R. This also takes into account that the customer demand cannot be always
satisfied 100% of the time. 

Hence what we have is:  


R = Relationship between forecast accuracy and service level (Service Factor)  
W = Delivery time (in days) / Forecast Period (in days)  
MAD = Mean absolute deviation (parameter for forecast accuracy) 

Now If replenishment lead time is greater than the forecast period by factor W then: 

Safety Stock = R x Sq.rt. W x MAD 

Else 

Safety Stock = R x W x MAD 

Now in SAP If the material is produced in-house, the delivery time is: opening period + in-house
production time + goods receipt processing time. It is expressed in workdays. The forecast period
is taken from the material master record and is also expressed in workdays. 
If the material is procured externally, the delivery time is: Processing time for purchasing +
planned delivery time + goods receipt processing time. It is expressed in calendar days. The
forecast period is taken from the material master record and is also expressed in calendar days. 

As a result of this you will have observed now that the safety stock must cover both the
unplanned material excess consumption, as well as the additional requirements caused by
delayed deliveries. 

In SAP you can specify a minimum safety stock. If the result of the safety stock calulation by the
system is lower than this limit, the safety stock is automatically set to this value. You enter the
minimum safety stock in the material master record (MRP 2 screen). 

Safety Stock: 

In IMG -> Materials Management -> consumption Based Planning -> Master Data -> Check MRP
Types (transaction code OMDQ) you use the indicator Calculate Safety Stock so that system
calculates the safety stock automatically. 

The safety stock can be calculated automatically for materials planned with one of the
consumption-based planning procedures if:  
1. The service level has been maintained in the material master record.  
2. Historical data exists  
3. The forecast has been carried out for the material. 

Dynamic Safety Stock: 

If the option Define Range of coverage profiles is chosen in IMG (Tr.Code OM1A) you can
determine a safety stock level that takes into account: 

1. Requirements.  
2. Range of coverage 

The limiting factors to the above are: 

1. Maximum and minimum range of coverage ( defined period , that is month, week or PPC
planning calendar)  
2. Determination of various periods for the validity of the range of coverage. 

The system uses the formula: 

Dynamic safety stock = average daily requirements (ADR) x Range of coverage 

ADR = Requirements in the specific period / number of days in the total period length (defined
period x standard days) 
Please note here that if you carry out the planning run even in the middle of the month the system
will include even the requirements planned at the beginning of the month. 

Please also note that you can determine the range of coverage for a maximum of 3 periods. 

1. Range of Coverage in the First Period  


2. Range of Coverage in the second period  
3. Range of coverage on the rest of the horizon 

However you have the option of maintaining different coverage for each of these periods. 

Based on your customization the system determines the number of days used for calculating your
average daily requirement 

Minimum Stock Level (mSL) = ADR x minimum range of coverage  


Target Stock Level (Dynamic Safety Stock this is DSL) = ADR x Target range of coverage.  
Maximum Stock Level (MSL) = ADR x maximum range of coverage. 

Having confirmed the above, I will now try and explain through an example how the system
calculates the Dynamic safety stock: 

Presume that the system has determined the ADR as 25 Kgs for a material. 

You have set the following in customizing: 

Minimum Range of coverage = 2 days  


Target Range of coverage = 6 days  
Maximum Range of coverage = 10 days 

Now the System determines the following; 

mSL = 2*25 = 50 KGs  


DSL = 6*25 = 150 KGs  
MSL = 10*25 = 250 KGs 

This is what happens for various levels of stock 

Case 1: 

Stock = 45 Kgs  
System Activity = DSL – stock  
Procurement Proposal = 105 Kgs 

Case 2: 
Stock = 60 Kgs  
System Activity = DSL – stock  
Procurement Proposal = 90 Kgs 

Case 3: 

Stock = 155 Kgs  


System Activity = none  
Procurement Proposal = none 

Case 4: 

Stock = 255 Kgs 

System Activity = System checks whether the procurement proposal is firmed and if yes it
displays an exception message. 

Also note that in the case of Time Phased materials planning The range of coverage is calculated
differently.

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