SIP inventory policies
- Specified Service Level by Item (SSLI)
- Specified Number of Safety Factor (SNSF)
- Days Cover (DC)
- Fixed Quantity (FQ)
Specified Service Level by Item (SSLI)
The SSLI policy calculates safety stock to meet a specified customer service level during the replenishment lead time.
A service level represents the percentage of demand during the lead time that can be fulfilled from inventory. For example, a service level of 97% means that 97% of demand occurring between the placement of a replenishment order and receipt of the order must be fulfilled.
This policy is useful for:
- Items with less accurate forecasts
- Items that require frequent replenishment
- Environments where inventory is used to protect customer service, such as distribution depots.
- Safety stock calculation
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The SSLI policy uses these parameters:
- Performance level (PL): Percentage of annual demand to be fulfilled from stock.
- Demand over lead time (q): Expected demand during the replenishment lead time.
- Standard deviation (s): Demand variability during the lead time.
- Annual usage: Total expected annual demand.
The safety stock is calculated using the following formulas:
- Safety stock in units (ss) = k × s
Where:
- k = Safety Factor
- s = Standard Deviation over the lead time
- Safety stock in days = ss / (Annual Usage / 365)
The value of k (safety factor) is the inverse of Partial Expectation E(k)
E(k) = ((1 - PL) × q) / s
Where:
- E(k) = Partial Expectation function
- PL = Performance Level (service level target)
- q = Demand over the replenishment lead time
- s = Standard Deviation over the lead time
| Parameter | Value | Description |
|---|---|---|
| Performance Level | 97% (0.97) | Target service level |
| Demand over lead time | 500 units | Expected demand during lead time |
| Standard deviation | 50 units | Demand variability during lead time |
| Annual usage | 36,500 units | Total expected annual demand |
- Step 1: Calculate partial expectation E(k)
E(k) = ((1 – PL) * q)/s = (1 - 0.97) * 500/50 = 0.33 * 10 = 0.3
- Step 2: Determine safety factor k
Using statistical tables or software for inverse Partial Expectation function (E(k)) = 0.3, k = 1.27
- Step 3: Calculate safety stock in units ss
Safety stock in days ss = (k * s) = 1.27 * 50 = 63.5 or 64 units
- Step 4: Convert safety stock to days
Safety stock in days = ss / (annual usage/365) = 64 / (36,500/365) = 64 / 100 = 0.64 days
The SIP engine sets a safety stock of approximately 64 units, which corresponds to about 0.64 days of inventory required to maintain the 97% service level. The calculated safety stock and other related results are displayed in the SIP Output panel.
Specified Number of Safety Factor (SNSF)
The SNSF policy uses a specified safety factor instead of a target service level. The safety factor (k) represents a multiple of the standard deviation of demand during the lead time. For example, a safety factor of 2.0 means that the safety stock is twice the standard deviation over the lead time.
- This policy is used for slow-moving items where demand is low or less predictable.
- This policy does not consider the service-level contribution provided by working stock from order lot quantities.
- Safety stock calculation
- Safety stock in units (ss) = k × s
The SNSF policy uses the following parameters:
- Performance level (k): User-specified number of standard deviations.
- Standard deviation (s): Demand variability during the lead time.
| Parameter | Value | Description |
|---|---|---|
| Performance Level (k) | 1.5 | User-specified safety factor |
| Standard deviation | 40 units | Demand variability during lead time |
Formula: Safety stock in units (ss) = k × s
Calculation: 1.5 * 40 = 60 units
The SIP engine sets a safety stock of 60 units. The calculated safety stock and related outputs are displayed in the SIP Output panel.
Days Cover(DC)
The DC policy sets safety stock to cover forecasted demand for a specified number of days.
- This policy does not account for variability between items and does not guarantee a minimum service level.
- This policy is primarily used for comparison with more advanced safety stock strategies.
- Safety stock calculation
- safety stock in Units - ss = (PL * A)/(365 * s)
The DC policy uses these parameters:
- Performance level (PL): Number of days of supply.
- Estimated annual usage (A): Annual estimated forecast usage.
- Standard deviation (s): Demand variability during the lead time.
| Parameter | Value | Description |
|---|---|---|
| Performance Level (PL) | 14 | User-specified safety factor |
| Estimated annual usage (A) | 36,500 units | Annual estimated forecast usage |
| Standard deviation (s) | 50 units | Demand variability during lead time |
Formula: Safety stock in units (ss) = (PL * A)/(365 * s)
Calculation: (14 * 36,500)/(365 * 50) = 28 units
The SIP engine sets a safety stock of approximately 28 units. The calculated safety stock and related outputs are displayed in the SIP Outputs panel.
Fixe Quantity (FQ)
The Fixed Quantity policy sets safety stock to a fixed, user- specified quantity. For example, a performance level of 750 units means that 750 units are held as safety stock for an item.
This policy is useful for items with irregular demand and for items where manual control of safety stock is preferred.
- Safety stock calculation
- Unlike other policies, the FQ policy does not calculate safety stock from demand variability or service levels. The FQ policy uses the fixed safety stock quantity specified as the Performance Level (Fixed stock quantity)
Formula: Safety stock in units (ss) = PL
The SIP engine returns the specified fixed quantity as the safety stock. The calculated safety stock and related outputs are displayed in the SIP Outputs panel.