17 Jan 2020

Can Safety Stock be negative?

Can Safety Stock be negative?

Can your planning process allow for carrying no safety inventory or in the extreme a negative safety stock?  

In other words, can you deliberately stock out for certain periods of the year?  Does it make #business sense to stock out?  

Planners sometimes are puzzled to see negative safety stocks calculated in their planning systems, unless you have a system from a century ago that asks you to manually enter the safety stock.

First, is a question to all of you - why and under what circumstances can your calculated safety stock be negative?

If you have a Make-to-Order contractual arrangement with your customer, you will carry no inventory.  

Inventory = Lead-time Demand + Safety Stock.  

As the customer is waiting for you to make the product, you carry no inventory other than the work-in-process over the waiting time.  And definitely no safety stock other than the raw material needed to make the product.  So Finished goods inventory is nearly always zero.

Negative Safety stock does not mean negative inventory.  That could be an accounting mistake and a nightmare.  The tax authorities and the Accounting regulators may come after you if you show negative inventory in your books.  

Negative Safety stock implies you are carrying an order backlog or unfilled orders.  Orders ready to be filled and waiting perhaps with a check ready to be deposited in the bank like in the case of Boeing.  

Customer service costs money.  Higher service levels require more precision in your demand signals and/or higher safety inventory.  Inventory is not cheap and can burn cash and make you less profitable.  

If your targeted service level is 95% and you are providing 100% service level already, it may be time to stock out for some time to average down........... right?

Here is an invitation to the supply chain planners who want to learn the details of this challenge and understand Inventory Optimization.

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