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What is the role of safety stock in an mrp system

The main goal of safety stocks is to absorb the variability of customer demand. Indeed, production planning is based on a forecast, which is by definition different from the real demand. By absorbing these variations, safety stock improves the customer-service level.

Creating a safety stock will also prevent stockouts from other variations, like an upward trend in customer demand. Safety stock is used as a buffer to protect organizations from stockouts caused by inaccurate planning or poor schedule adherence by suppliers.

As such, its cost in both material and management is often seen as a drain on financial resources that results in reduction initiatives.

In addition, time-sensitive goods such as food, drink, and other perishable items could spoil and go to waste if held as safety stock for too long. The lower the service level, the lower the requirement for safety stock.

Most ERP systems provide a type of production planning module. An ERP module such as this can help a company develop highly accurate and dynamic sales forecasts and sales and operations plans. By creating more accurate and dynamic forecasts, a company reduces its chance of producing insufficient inventory for a given period, thus should be able to reduce the amount of safety stock required.

While an ERP system aids an organization in estimating a reasonable amount of safety stock, the ERP module must be set up to plan requirements effectively. An inventory node is supplied from a "source" which fulfills orders for the considered product after a certain replenishment lead time. In a periodic inventory policy, the inventory level is checked periodically such as once a month and an order is placed at that time as to meet the expected demand until the next order.

In this case, the safety stock is calculated considering the demand and supply variability risks during this period plus the replenishment lead time. If the inventory policy is continuous policy such as an order point-order quantity policy or an order point-order up to policy the inventory level is continuously monitored and orders are placed with freedom of time.

In this case, safety stock is calculated considering the risk of only the replenishment lead time.

What Is The Role Of Safety Stock In An MRP System?

If applied correctly, continuous inventory policies can lead to smaller safety stock whilst ensuring higher service levels, in line with lean processes and more efficient overall business management.

However, continuous inventory policies are much harder to implement, so most of the organisations using traditional planning processes and tools opt for periodic inventory policy.

Methods for calculating safety stocks[ edit ] Reorder point method with demand and lead time uncertainty for type I service[ edit ] A commonly used approach calculates [6] [7] the safety stock based on the following factors: Demand is the number of items consumed by customers, usually a succession of independent random variables.

Lead time is the delay between the time the reorder point inventory level which initiates an order [8] is reached and renewed availability. Service level is the desired probability of meeting demand during the lead time without a stockout.

If the service level is increased, the required safety stock increases, as well.

  • As such this figure is not stock, it is cut-off figure maintained in master which is used for Planning and once the stock level dips below this value, you can configure system to generate PR, orders automatically;
  • This is quite strange as it is unheard of to use MRP without safety stock;
  • Experience with safety stock in MRP has shown clearly that the cushions are rarely found on items affected by users, nor are they large enough to be useful.

Forecast error is an estimate of how far actual demand may be from forecast demand. Assuming that demand during successive unit time periods are independent and identically distributed random variables drawn from a normal distribution, the safety stock can be calculated as: