Why does the derive-from-maximums option give me a huge safety stock, and when is that too cautious?
Because the rule multiplies the highest daily sales you have seen by the longest lead time you have seen, then subtracts normal usage. Your worst day and your worst delay rarely happen together and last through the whole wait, so the safety stock can come out at several times what you normally sell during a lead time. It is a simple, cautious rule, not a statistical service-level calculation.
The example that surprises people
You sell 10 units a day, and the supplier usually delivers in 7 days. Once, on a promotion day, you sold 30 units, and once the supplier ran 21 days late because of a shipping problem. You entered these figures and chose 'Derive from maximums'.
Highest usage over the longest lead time: 30 × 21 = 630 units.
Normal usage: 10 × 7 = 70 units.
Derived safety stock: 630 − 70 = 560 units, eight times what you normally sell while you wait.
The reorder point becomes 70 + 560 = 630, which is the highest usage itself. In other words, you are preparing for a scenario in which you sell 30 units every day for 21 days straight, when each of those figures happened only once, and never together.
Why the figure balloons so fast
Because multiplying compounds each extreme. Peak sales here are three times normal, the worst delay three times normal, and their product nine times normal usage. A single unusual event in either figure is enough to push the result way up.
Try more realistic maximums
Leave out the promotion day and the one-off late shipment, and use the highest daily sales on ordinary days, 18 units, and the longest usual delay, 10 days: highest usage 18 × 10 = 180, safety stock 180 − 70 = 110 units. That still protects you from busy days and normal delays, without assuming both disasters strike at once.
Deciding what suits you
- Check where each maximum came from: did it recur, or was it a single event with a known cause that is unlikely to repeat soon?
- Price the resulting safety stock: 560 units at your purchase cost is cash sitting on the shelf. Can you carry it?
- If it is too much, switch back to 'Enter it myself' in the Inventory reorder-point calculator and enter a smaller figure, accepting a slightly higher risk of running out.
- If the product is critical and running out costs you customers, the extra caution may be worth it. That is a business call; the calculator only gives you the number.
A large safety stock means a bigger order than usual the first time you raise it. Before sending it with the Purchase-order generator, think about how long that money takes to come back; the Break-even calculator shows how many units you need to sell to cover your fixed costs before extra stock turns into profit.
Common questions
Is there a more precise way to set safety stock?
There are statistical methods based on how much demand varies and a service level you choose, and the calculator does not offer them. It offers a simple rule based on the worst you have seen, plus the option to enter your own figure.
Why does the reorder point equal the highest usage with this option?
Safety stock is highest usage minus normal usage, and the point is normal usage plus safety stock, so normal usage cancels itself out.