One year safety stock is as useless as a chocolate teapot

So, let’s talk safety stock! Let’s say allocations and component lead-times are constantly increasing, and a business unit/customer is asking you to implement a full year of safety stock. They cannot afford the production to be late anymore. And they are ready to finance it. That’s right, they agree to pay for it! But here is why a full year of safety stock is extremely expensive and, in fact, as useless as a chocolate teapot.

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How useful is a year of safety stock?

Funniest part first! The odds are high that your business unit / customer will request the implementation of a safety stock 6 to 12 months after the allocation already began. During allocations, the job of manufacturers and distributors is to ship components only to those who really need them and to those ready to pay the highest price. Believe me, a sudden one year volume of additional orders during an allocation will be understood for what it is… so those “safety” orders are in fact working against you!

I am aware that customers want more inventory than they have – call it just-in-time versus just-in-case. Mike Long, Arrow Electronics CEO

What suppliers are taking into account is customers’ buying history. Components with no allocation and short lead-times will be shipped and invoiced. But you will have to wait another 9–12 months before having the allocated and high lead-time components at stock. Guess what, it will be the end of allocations!

The hidden costs of safety stock

You’ll have to fight to get the components. To answer weekly calls with your customer. Be audited. Implement indicators… All those days spent on Excel files won’t be financed.

But here’s the worst part: you will buy a full additional year quantity at the high allocation prices. And you will not benefit from the bubble bursting and price collapsing. Again, very very costly.

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That being said, it could make sense to implement a full year safety stock. But it has to be 3 to 4 years after the last allocation. In order to be ready for the next cycle. But wait… have you ever seen someone ready to finance 1 year quantity stock when lead-times are short?

One year safety stock is as useless as a chocolate teapot

 

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