Holding inventory is a way of life. Everybody carries inventory of some kind. In my home, the central supply location is the kitchen. In supply chain speak, my kitchen is a multi-bin facility designed to optimize labour and storage. I also have a separate supply location for specialty items which require refrigeration. This would be the products that fall into the dairy and meat category. Some items are critical. Running out of sugar is one thing but a coffee shortage will definitely disrupt operations.
Running out of coffee, however terrifying for my family, does not compare to the effect of inventory shortages on productivity and ultimately patient outcome in a healthcare scenario. Hospitals must play it safe by holding inventory to carry them thru probable spikes in usage. I use the word probable quite deliberately because probabilities play a big part in determining how much to invest in safety stock.
Variations in demand history provide an indication of the safety stock needed to maintain a desired service level. Another factor is variations in lead time. Planners use tools to assess the likelihood of a stock-out based on these statistics and set safety stock thresholds accordingly. Mathematically speaking, planners look at the extent to which an event, in this case a stock-out, is likely to occur.
Service levels represent the desired probability of a stock-out. A 95% service level translates into a 5% risk of completely depleting safety stock within an order cycle. Why not shoot for a 98% or 99% service level? Well, it comes down to money. Doesn’t it always? The difference in monies invested is substantial. As the service level increases so does the service factor used to compute safety stock. For example, an increase in service level from 95% to 97.5% will double the necessary safety stock. Retailers typically target between 90% and 95% service levels. In the end, individual organizations must determine what is economically viable for their circumstances.
My family’s coffee supply is managed using a simple 2-bin system. I keep two containers of coffee in my cupboard, when the first one is empty I open the second one and replenish the empty one. A simple, yet extremely effective method of supply for my morning cup of joe!