Direct Material Safety Stock Standard - A Study at IKEA Industry

Abstract: Title: Direct Material Safety Stock Standard Authors: Oscar Gustavsson, Oskar Strömberg Supervisors: Gustaf Lilja, IKEA Industry Eva Berg, Division of Industrial management and logistics, Lund University Contribution: This thesis has been a complete elaboration between the two authors. Each author has been involved in every part of the process. Background: In a time when everything is available at the click of a button and consumers are expecting next-day delivery, the work for high service levels is at full speed. Stock is a cost which needs to be minimized, but how low can it go before it has a negative impact on the service levels? In the fast-changing environment, safety stocks have gained a growing importance while the improving production systems have made lower safety stocks a possibility. The question is, what is the correct safety stock level? Problem description: IKEA Industry is aiming towards higher levels of standardization and unified ways of working. All with the purpose of lowering costs and increasing revenues. In this process, introducing a standard for working with direct material safety stocks is one step in the right direction. Currently, each supply planner is responsible for safety stocks within their area and they may work in several different ways. With a safety stock standard, the scientific parts of this work will increase, the knowledge loss when one quits will be reduced, and further development easier. Purpose: The purpose is to improve the current direct material safety stock by creating guidelines and a model to standardize the way that IKEA Industry factories handle safety stock. Research questions: 1. Which factors affect safety stock levels? 2. How do these identified factors affect the safety stock levels at IKEA Industry? 3. How should a standardized tool be developed to be able to continuously estimate safety stock levels at IKEA Industry’s factories? Methodology The approach is a systems approach, taking a holistic overview of a case study at one production site. In addition to the case study, there is a quantitative strategy and analysis to measure the effects of different safety stock methods, resulting in a mixed methods strategy. The quality is evaluated based on its reliability, validity, and objectivity. Conclusion The initial part of the thesis concludes that the safety stock is affected by seven main factors: demand pattern, service level, lead times, cost of stock, component commonality, order policy, and product quality. For IKEA Industry, four of these factors are extra important: demand pattern, service level, lead times, and cost of stock. Volatile demand patterns and high service levels both require higher safety stock; longer lead times increases safety stock; the cost of stock limits the amount of safety stock. The standardized tool developed during this thesis considers production deviations, delivery delay deviations, lead times, and a target service level to calculate a suggested safety stock and safety time for each article. Articles are divided into A, B and C-categories depending on their order production frequency. For A and B-articles, a combination of safety stock and safety time is suggested, while C-articles are suggested to only use safety time. The suggested levels will be presented in a QlikView application. The application allows the user to set the desired service level and ABC-categories. Then the current and suggested safety stock and safety time are presented in a table. The application also shows each part of the safety stock calculations, thus allowing the user to perform analysis for individual articles. Keywords Safety stock, safety time, safety stock under MRP, inventory control, Combining safety stock and safety time, decision support framework