1 point by vermorel 4 weeks ago | flag | 1 comment
vermorel 4 weeks ago | flag

I have two main objections to safety stocks, a stronger one and a weaker one.

First, my stronger objection is that safety stocks contradicts what basic economics tell us about supply chain. By design, safety stocks are a violation of basics economics. As expected, safety stocks don't end-up proving economics wrong, but it's the other way around. Economics are proving safety stock wrong. This argument will be detailed in my upcoming lecture 1.7, see https://lokad.com/lectures

Second, my weaker objection, is that safety stocks, as presented in every textbook, and as implemented in every software, are hot nonsense. Not only Gaussians are used both for demand and lead time - while they should not - but also the way lead time is combined with demand is also sup-par. This argument is weak because, in theory, safety stock formulas could be rewritten from scratch to fix this; however, the first, stronger objection remains, thus, it's moot.

See also:

- Why safety stock is unsafe https://tv.lokad.com/journal/2019/1/9/why-safety-stock-is-unsafe/
- Retail stock allocation with probabilistic forecasts - Lecture 6.1 https://tv.lokad.com/journal/2022/5/12/retail-stock-allocation-with-probabilistic-forecasts/