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Safety Stock vs Flow: The fundamental difference!

Having worked with Advanced Planning Systems for the past 25 years, there is one common denominator I have seen in all the traditional forecast driven MRP methodologies and that is…

“If you want to increase service levels, all the formulas call for more safety stock.” 

Even the more advanced formulas that include demand and supply variability require you to reduce forecast errors and lead time errors to offset the impact of higher safety stock needed to improve the service levels. 

Hence, if you are unable to improve forecasts errors or lead time variabilities, as most companies struggle to do, guess what happens? Your safety stock increases as you target higher service levels. It is basic math. 

This is where a fundamental difference appears between a traditional forecast driven MRP operating model and a Demand Driven operating model. A Demand Driven operating model is a flow-based methodology. With a flow-based methodology as Plossl’s Law states…

“If you increase flow; you will increase service levels and need less inventory “ 

And what makes this even more appealing is that you will not have to improve forecast error or supplier reliabilities to achieve these results. Companies like Sames Kremlin, Protea Chemicals and CCBA that have all adopted a flow based operating model are achieving lower inventories and higher service levels with no improvements to forecast errors; as presented at Demand Driven World 2019. 

Makes you think!