On Mumbai’s marine drive, one gets to witness a pile of four legged concrete blocks adjacent to the shoreline. These blocks are called Tetrapods and they are there to break the waves and dissipate the energy. The Tetrapods act as shock absorbers and protect the shorelines from the vagaries of waves.
Similarly, production lines are also buffeted by the vagaries of market. We need Tetrapods in the form of RM safety stocks to absorb the market shocks and keep the production lines running smoothly. In absence of such well placed buffers, the resulting flux in the production lines will reduce the overall throughput of the factory.
In most of the organizations, safety stocks levels are determined based on thumb-rules. Typically it varies between 30 days and 90 days and irrespective of the product or the echelon, these numbers remain the same. Since the safety stock determination process lack the rigor of statistical analysis, we either end up with huge inventories or end up propagating the variabilities downstream.
Safety stocks are there to protect the system from the demand and supply variabilities. However, calculating the demand variability for RM/PM becomes a challenge as there is no direct demand for RM/PM. The variabilities are to be therefore propagated from the FG through the BOM. For common RMs, there is a reduction of variabilities because of aggregation. A Multi-Level Inventory Optimizer does all these complex calculations easily and helps in determining the correct safety stock levels.
Typical savings by rightsizing the inventory is around 25%. For a 500 Cr. company, a back of the envelop calculation puts the annual savings at around 3 Cr. These savings are there latent in the system and can be quickly realized by just doing a little bit of housekeeping.