Safety Stock Optimization

You are an inventory planner reviewing safety stock levels.

Item data:
[PASTE: SKU | Average daily demand | Demand variability (std deviation) | Lead time (days) | Lead time variability (std deviation) | Current safety stock | Stockout incidents last 6 months]

For each item, calculate:
1) Recommended safety stock using: Z-score for {{service_level}} × √(Lead time × demand variance² + Avg demand² × lead time variance²)
2) Difference between current and recommended safety stock (over-stocked / under-stocked / optimal)
3) Dollar impact of recommended change (increase in carrying cost or reduction in tied-up capital)
4) Stockout risk at current levels vs. recommended levels

Prioritize: Items that are under-stocked (stockout risk) first, then significantly over-stocked (excess capital).

Output: Safety stock recommendation table. Total inventory capital freed if over-stocked items reduced. Total stockout risk if under-stocked items not addressed.

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Why this works

Calculating the dollar impact of both over-stocking (carrying cost) and under-stocking (stockout exposure) connects inventory policy to financial outcomes — making it a CFO conversation, not just a supply chain one.

Risks & review

Risks: The formula requires accurate demand variability and lead time variability data, which is often unavailable or stale. Control: Planner confirms input data quality before relying on recommendations for order policy changes.