Q&A from Users

In calculating safety stock, you state that lead times are determined externally. Is the lead time given to you by the customer (which could vary enormously from customer to customer for the same SKU) or internal lead times for replenishment of inventory of the SKU?

Depending on where the safety stock policy is set, the leadtimes are determined by the production or distribution process. For example, if Plant A takes three months to produce and ship a product to Distribution point XY, the lead time for safety stocks here is three months for setting inventory policy at Distribution Point XY. To be consistent, the safety stock at XY is based on the demand forecast error at this DC. This demand forecast error will be a function of the individual customer demand forecast errors at this DC.

To answer this question, the leadtime for setting safety stock at this DC does not depend on the customer lead time, just the production and transportation internal lead time. However, the forecast error at this DC will be subject to the vagaries of fluctuating customer demand. The key is to remember that the safety stock is set based on the source lead time. The following chart may be helpful:

In the above is XY is the our Distribution Point and YZ is the factory. MX is the customer's Receiving point. The lead time for the customer to receive the product is 3 weeks from our Distribution Point XY. The lead time for our DC to receive the product from the factory including production and shipping is 5 weeks. With this set up,

If you carefully notice, we assume that the factory does not have any finished goods inventory of its own and all of the finished product is shipped to the DC. If the factory does carry its own inventory, then the LT at XY will be shorter than five weeks.