SUPPLY CHAIN

Build Safety Stock, Then Forget You Have It

YOSEF SHEFFI
Head of the center for transport studies, MIT, Cambridge, Mass.

I think security is a long-term issue, and it may lead to some of the following mitigation strategies. One is deciding which parts are crucial for your production line and which parts can withstand a longer lead time. Usually these decisions are based on how well you can forecast demand for these items and how good the forecast is. For hard-to-forecast items, companies may want to start building some safety stock, but for the bread-and-butter items that are replenished day in and day out there will not be a big impact. Original equipment manufacturers are not going to increase their safety stock for items across the board?just the ones that are hard to forecast.

The other strategy is to have good suppliers. For example, the majority of your stock may come from overseas at low cost, but now you will have a secondary local supplier to whom you have to give some business right now. You can’t just keep them on standby. People always knew that you had to have more than one supplier, but it was OK to have one supplier in Taiwan and one supplier in Singapore because while one might have political or labor problems you always had the other. Now, introducing security into the equation, I may want one abroad and one in America.

Just-in-time manufacturing is here to stay. Smart companies may build some safety stock, but it will be independent of just-in-time. They will not give in to the temptation of using the safety stock, because there are lots of other benefits of just-in-time besides low inventory?specifically high quality and quick diagnosis of supply chain problems. With just-in-time you don’t have inventory to cover up your problems. Now you will have to act as if you don’t have inventory even though you do.

Inventory is a security blanket?it allows you to cover up your problems. The key to running just-in-time is to cover yourself from supply chain disruptions with some inventory or a local supplier. It will be a mistake to move to just-in-case.

The decision of when to use your safety stock depends upon the fundamental difference between something you control and something you do not. For example, if you have a disruption because terrorists attack the World Trade Center and the border is closed, there is nothing you can do to fix it. Then you use your safety stock. However, if your supplier starts shipping defective material, stop the line and fix the problem immediately as if you don’t have the extra inventory. With safety stock, the temptation is to say, "We have inventory, don’t worry about it." But that’s exactly when you need to address the problem.