Safety stocks and component commonality

Abstract In the implementation of an MRP‐based planning system it is often desirable to hold safety stocks at the component level. This approach is typical of a system that assembles finished products to order but builds components to a forecast. The same approach makes sense when end‐item buffers would be prohibitively expensive to maintain, or when there is significant spares demand for the components. The existing theory for sizing component safety stocks is little more than an application of the principles governing single‐level inventory decisions. The standard deviation of the distribution for demand is the key parameter. A multiple of this standard deviation, called the safety factor, is set by management policy. This safety factor determines the size of the safety stock. In simple cases there is a direct relationship between the safety factor and the level of customer service. Component commonality refers to a situation in which one component is common to more than one end item. The presence of commonality makes it difficult to determine safety stocks accurately. The existing theory, which is reviewed briefly, examines the effects of commonality on the component's safety factor. However, commonality destroys the relationship between safety factor and service level. This article introduces a simple example to illustrate this fact. The example suggests some problems that must be addressed if the theory is to encompass commonality. Among these are the need to develop service level measures for multiple products and to analyze the relationship between safety stock and service level.