Part 1
Course reading
Safety stock is extra inventory held to protect against demand and lead-time uncertainty. Too little causes stock-outs; too much ties up cash and space. The target is a chosen service level, the probability of not running out during a replenishment cycle.
A common formula when demand varies and lead time is stable: Safety stock = Z x standard deviation of daily demand x square root of lead time in days. Z is the service factor: about 1.28 for 90 percent, 1.65 for 95 percent, 2.05 for 98 percent and 2.33 for 99 percent.
Example: daily demand standard deviation is 20 units, lead time is 9 days, target 95 percent. Safety stock = 1.65 x 20 x 3 = 99 units. Reorder point = average daily demand x lead time + safety stock. If average demand is 100 units per day: 100 x 9 + 99 = 999 units.
Service level cost rises sharply near 100 percent: moving from 95 to 99 percent raises Z from 1.65 to 2.33, about 41 percent more safety stock. Differentiate by ABC class: high service for critical A items, lower for C items. Review safety stock monthly or when demand or supplier performance changes. In SAP MM, safety stock is maintained in the material master MRP 2 view, and MRP uses it when calculating net requirements and planned orders.