How is safety stock calculated in a stable demand environment?

How is safety stock calculated in a stable demand environment?

• A. Safety stock = z * sigma * sqrt(lead time)
• B. Safety stock equals forecasted demand over the next period.
• C. Safety stock is the same as service level.
• D. Safety stock is not used when demand is stable.

Answer: (A)

The idea being tested is buffering against variability that can occur during the replenishment lead time. In a stable demand environment, you still face uncertainty in how much demand will occur while you’re waiting for an order to arrive, so you hold extra stock to prevent stockouts. The standard approach is safety stock equals z times the standard deviation of demand during lead time. If each period has a demand variability of sigma and the lead time is L periods, the variability over the lead time is sigma times the square root of L, so safety stock = z * sigma * sqrt(L). The z factor comes from the desired service level—the higher the service level, the more safety stock you keep. This is different from forecasted demand for the next period, which would determine cycle stock, not the buffer. Even with stable demand, safety stock accounts for lead-time uncertainty and possible supply interruptions.

The idea being tested is buffering against variability that can occur during the replenishment lead time. In a stable demand environment, you still face uncertainty in how much demand will occur while you’re waiting for an order to arrive, so you hold extra stock to prevent stockouts. The standard approach is safety stock equals z times the standard deviation of demand during lead time. If each period has a demand variability of sigma and the lead time is L periods, the variability over the lead time is sigma times the square root of L, so safety stock = z * sigma * sqrt(L). The z factor comes from the desired service level—the higher the service level, the more safety stock you keep. This is different from forecasted demand for the next period, which would determine cycle stock, not the buffer. Even with stable demand, safety stock accounts for lead-time uncertainty and possible supply interruptions.