How does a manufacturing company know how much safety stock to hold?
Safety stock is needed where uncertainty exists whether the uncertainty is in supply or demand. Uncertainty of supply is generally more controllable and, being further down in the supply chain, it is easier to recover from minor problems. Safety stock to cover uncertainty of supply should therefore be kept to a minimum and the cause of the uncertainty tackled. Uncertainty of demand is generally less controllable. The stock you need to carry depends on whether the product is engineered to order, made to order or shipped from stock. For make to order and engineer to order companies, what to stock and how much is essentially a commercial decision based on your customer’s required lead time compared to your cumulative lead time (for definition see jargon buster), combined with the accuracy of your forecast (see below). For engineer to order companies, design time has to be included. Balanced against the commercial requirement to hold stock is the financial requirement to carry as little st
