How To Optimize Safety Stocking

Kirk Tanner explains the importance of safety stock and how to maintain it with automatic reorder points or by manually reordering products when they get low.

Welcome back to Whiteboard Wednesday. I’m Kirk Tanner, Chief Marketing Officer at Fishbowl. Today we’re gonna talk about safety stock.

And calculating safety stock is all about time – the amount of time it takes to order product, get it through your receiving, and back on the shelves so that your shelf in your warehouse never falls below a certain number, say five items – maybe that’s your safety stock. That’s what safety stock is all about.

So we’ve got a couple different things on the whiteboard here. One out here is a manual process and the inside circle is an automated process. And we’ve done that for a specific reason. The manual process, which we’ll talk about in detail, obviously takes a lot more time than this automated process. It’s a lot faster, so you’ve got some real nice efficiencies with this automated process.

But let’s talk about specifics here. If you’ve got a business, you’ve got a demand for products. Whether you’re manufacturing, doing wholesale distribution or just selling products, you’ve got demand.

Now, when you have to reorder into stock, in your manual process you might be basing that just off the calendar. You might say that this particular product you’re just gonna order the last week of every month. Or it might be based off of just when you run out, which is not a really good strategy because that means that you’ve got a lot of time before you get product in and you’re gonna lose some sales.

Either way, in this manual process when you complete this stage you’re gonna issue a purchase order. Sometimes that’s a warehouse manager, which means somebody has to approve that purchase order before it goes out. And then you’re gonna place that order (it might be by phone or online) and you’re gonna have to log all of these steps to make sure that you know what you’re doing. You wanna know who you ordered from, how many, what it costs – those kinds of things. But eventually that purchase order arrives up here with your vendor.

Now, in the automated process this is a lot shorter. You can set reorder points in software that say, “Hey, when I get to five, just automatically reorder from my vendor of preference.” And that way, very little labor involved in that.

Either way, we’ve got a purchase order up here with your vendor. They’re picking whatever you need and they’re gonna ship it to you.

Now it’s coming back into your business and it’s arriving in receiving, and you’ve got a variety of things that you have to do over here on the manual side. You may have to check that manifest, so that shipping bill, to make sure you got everything that you needed. You’re gonna log all that. All this information is gonna be filed away.

And then eventually you’re gonna move that shipment of goods into your warehouse. Now sometimes you don’t want it all in your warehouse. Sometimes you’ll take this and you’ll put 80 percent into your warehouse and 20 percent maybe up front where you have a retail business for people who walk in.

When you do this in the manual process, whether it’s on a spreadsheet or in some kind of a log, you’re gonna wanna double check that to make sure that you did that split correctly because if you do that wrong and record it wrong now you’ve lost your inventory and you don’t know where things are.

Now, in this automated process it’s really slick because when product comes in you’re gonna take one of these barcode-scanning devices, you’re gonna scan that it’s arrived; it knows who it came from, it knows that you got enough of them – basically it’s confirming what this manifest says is what you actually ordered over here. And then when you split this up, you can use this scanning device again to make sure that the division of this shipment to your retail location up front and maybe your warehouse happened exactly the way it did happen. And your software will tell you exactly where all that is.

Of course, on the retail side when something gets sold or something gets shipped, in the automated system it’s all updated. When that happens in the manual system, you’ve gotta come back in here, you’ve gotta record that, and you’ve gotta keep track of all that.

This outside circle is very, very labor intensive. It’s prone to a lot of human error. If you’re doing this, you probably know what I mean because a lot of mistakes are commonly made in this manual process.

The automated process eliminates most of the human error. So it’s great if you can get into one of the software packages that allows you to automate all of this.

But the bottom line, what you’re trying to do is you’re trying to track how much time it takes on your side here to place an order, how much time for that vendor to complete it, and then how much time it takes to get it back into your system so you can start selling it.

Like we said, you can’t manage this one. This one’s out of your control. But you can track how long it takes, on average, for each one of your vendors to supply whatever it is you need. Again, on a manual side, labor intensive. With an automated process, it’s all kept track of and you know exactly how to calculate that time.

But once you’ve calculated that time, and let’s say that you want to keep five items on the shelf at all times as your safety stock, then you know how far in advance you always have to order to never fall below that safety stock. That’s what safety stock’s all about.

Thanks for joining us. Come again next week. Thanks.

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