Calculating Safety stock is an essential element of inventory planning for any inventory-driven business. All businesses need a steady inventory flow to keep their operations running and satisfy customers. Nevertheless, there are times when stock-outs occur unexpectedly, contrary to demand predicted, with little warning. Therefore calculating safety stock is an essential element of inventory planning for any inventory-driven business.

While avoiding stock-outs is necessary for businesses, maintaining excess safety stock is detrimental to the business too. Holding on to inventory means locking up a certain amount of working capital, with the added cost of storage, maintenance, and the risk of wastage. 

The levels of inventory and safety stock are dependent on the type of industry the business operates in. For example, for a business in DTC F&B, Pharmaceuticals and Quick commerce need to maintain a high inventory turnover ratio and thus need to plan their safety stock more dynamically to avoid wastage. In contrast, a business in consumer goods, electronics, and industrial machinery need to dynamically plan their safety stock to avoid potential stock-out or unused inventory. Kronoscope, with its sophisticated AI engine, helps businesses by automatically creating dynamic purchase plans, factoring in dynamic lead times, fill rates, shelf life, current inventory levels, open orders, and dynamic safety stock levels. Dynamic safety levels are assigned based on the demand variability and service level.

Factors Influencing Dynamic Safety Levels 

Demand Variability: High dynamic safety levels for high selling products with high demand variability should be maintained. Kronoscope’s advanced AI engine trains itself to predict demand accurately and reduce demand variability and suggest adequate safety levels. Dynamic Safety Levels allows companies to optimize working capital by spending only on high-risk products, giving businesses more control over their supply chain

Service Levels: Optimizing service levels is a very efficient way of avoiding overstocking inventory and service levels. Kronoscope allows demand planners to maintain adequate service levels by classifying the entire SKU group into ABC classifications as per Pareto Analysis. Class A products bring in the majority of the revenue and 95% of service levels are maintained for them. In Class B the service level suggested by the system is 80%-90% and for class C service level is 75%-80%. This approach ensures that long tail product’s inventory is not bloated by ensuring high service levels‍

Determining  Dynamic Safety Levels in KronoScope‍

Kronoscope calculates dynamic safety levels by factoring in the following variables:‍

1. Demand Variability: Demand variability is calculated as the square root of the average squared difference between actuals and predictions at a daily level‍

2. Service Level Factor: Kronoscope will use different service level multipliers depending on the SKU value categorization. SKU categorization is done on an ABC level where for high-value SKU, the service level used is 95%, which means it covers up to 95% of the errors historically witnessed between actuals and forecasts

3. Plan Coverage Days: This plan covers the number of days covered/duration, including supplier lead times

4. Supplier Fill Rate: Supplier fill level is the % of orders a supplier has generally filled on average. Fill rate adjusts safety buffers by using historical purchase and GRN data at the SKU-vendor level. In Kronoscope, supplier lead time variability can be accounted for by using the 95th percentile of supplier lead time when calculating order recommendations 

A final point to consider while calculating dynamic safety levels is the business's growth trajectory. A company aggressively expanding and ramping up its marketing may need to account for projected sales growth to realign its inventory levels.