Strategic stock: when you need it

Strategic stock is not ordinary safety stock. Safety stock covers everyday fluctuations, while strategic stock is kept for a rare but severe event: a supplier stopped, a transport route was cut, imports were restricted, an order slipped by several weeks. Such stock ties up money and often is never used. So it should be created not for every item, but selectively and with a calculation.

Which goods deserve it

Answer two questions:

1. What damage does having no stock cause? A line stops, a penalty is paid to a customer, safety is compromised or the season passes.
2. Can the item be replaced quickly? Is there another supplier, a similar item or a local market?

The answers give four cases:

• damage is large and the item cannot be replaced: a candidate for strategic stock;
• damage is large but replacement is easy: ordinary safety stock and a second supplier are enough;
• damage is small and replacement is hard: advance ordering, waiting;
• damage is small and replacement is easy: no special measures needed.

Typical candidates: an imported component from a single source, a special packaging material for production, a critical spare part for working equipment, a raw material that must be bought before the season.

Do not draw up the list alone. Hold an hour's session with the heads of production, sales and purchasing: list 30 to 50 important items and put the two questions above to each. The list of candidates is often much shorter than expected, which is good: fewer items mean less money tied up.

Working out the volume

The commonest mistake is to try to cover the whole length of the interruption. In fact the stock buys the time needed to switch to an alternative.

An example, with illustrative figures. A food producer uses 2 tonnes of packaging film a week, at 30 million so'm a tonne. The usual lead time is 5 weeks, which ordinary stock covers. Suppose an interruption could hold up deliveries for a further 6 weeks.

• Full protection: 6 weeks × 2 t = 12 t, or 360 million so'm. If holding (money, space, rotation) costs 18 percent a year, that is 65 million so'm.
• Switching to a second supplier takes 3 weeks: stock of 3 weeks × 2 t = 6 t, or 180 million so'm, holding about 32 million so'm a year.

For comparison, suppose a stopped line loses 40 million so'm a day. A 10-day stoppage costs 400 million so'm. If half the stock is enough, the second option is cheaper and covers the main risk. Include penalties and lost customers in the calculation too.

Check the length of the interruption against history, not guesswork: by how much did deliveries actually slip over the last two or three years, and how many days did the longest delay last? That figure gives a real basis for the worst case and stops people asking for a reserve of any size they like.

How to keep it

Strategic stock must not "dissolve" into the ordinary warehouse:

• keep it in a separate place under a separate code, and carry it in the records with a separate status or store, or it will be sold into an ordinary order;
• write down the right to use it: who authorises it and for which event;
• if there is a shelf life, rotate it: move the old stock into normal production and put new stock in its place;
• count it every quarter and check the storage conditions;
• review it once a year: if the risk map has changed or a second source has appeared, reduce the stock.

Show the value of strategic stock as a separate line in reports. Then management sees the "sleeping" money and each year judges whether it is still needed, and the stock is neither forgotten nor allowed to age.

Ways cheaper than stock

Strategic stock is one of the most expensive forms of protection. First consider other options:

• approve a second supplier in advance and test it on a small volume;
• a framework contract guaranteeing capacity;
• stock set aside in your name in the supplier's warehouse;
• a technical solution that lets you substitute one item for another;
• sharing the stock with two or three partners.

Conclusion

Strategic stock is for goods whose absence causes major damage: in a volume that covers not the whole length of the interruption but the time to switch to an alternative, and with strict rules. The OmborExpert specialists can help identify critical items, calculate the volume of the stock and write the storage rules.