For this example let's consider a part that is used weekly and therefore has an average demand of 1 unit per week. This type of part is a major target for squirrel stores as holding them reduces the number of trips to the storeroom.

Let's compare two situations:

1. No Squirrel Store: The item is removed from the storeroom as needed - 1 per week.

2. Squirrel Store: The item is removed two at a time with movement every two weeks.

The demand data for these two situations is shown in Figure 1.

How Much do Squirrel Stores Cost

The demand profile for these two different demand patterns is shown in Figures 2 & 3. It is clear from these two figures that, while in each case the average is one demand per week, the demand profile is not just different, it is completely opposite.

Demand Profile without squirrel store

Demand Profile with squirrel store 

Now, one way to calculate the inventory needs in this situation is by using a Gaussian distribution. This approach is familiar to most people as it can be represented by the formula:

Reorder = (Usage rate x lead time)
Point +safety stock

Alternatively:

RP = (D x LT) + csf x
MAD x Sqrt(LT)

Where,
RP = reorder point

D = average demand per week (for
our example this is 1 per week)

LT = Lead time in weeks (let's
assume 4 weeks)

csf = customer service factor (or
availability factor) - here we
will use a csf of 2.56, this
assumes a 98% availability.

MAD = Mean Average Deviation - a
measure of demand variation.
In this example, with no squirrel store
this is 0 (there is no variation) and with
the squirrel store the MAD is 1.

Sqrt = square root

Results
Scenario 1: Using the above formula and data, Figure 4 shows the results for this scenario.

Reorder points

It is a surprise to most people when they see that when you hold inventory in a squirrel store the Reorder Point in your official store can be MORE THAN DOUBLE the Reorder Point without the squirrel store.

This result then means that the average level of inventory held in your official store, if you allow a squirrel store, is 264% greater than the average holding without the squirrel store (see Figure 5). This is not due to the items held in the squirrel store but due to the Induced Demand Volatility (IDV) that the squirrel store creates in your official store. The IDV changes the calculation of safety stock in the above formula and this is why you hold too much inventory.

Scenario 2: Over ride the calculation and manually set your reorder point to 4 for both scenarios.

Inventory comparison

Let's now assume that you understand the impact of the IDV on your calculation and decide to manually set the reorder level for both situations to 4, knowing that you only ever use 4 items during the lead time for supply. In this case the average inventory holding reduces to 3.5 items (including the items held in the squirrel store).

This is still 40% higher than the situation without the squirrel store!

Do you still think that squirrel stores don't cost much?

Phillip Slater is an Inventory Process Optimization Specialist and is widely known as ‘The Inventory Guy'. He is the author of a number of books, including Smart Inventory Solutions and The Optimization Trap, both of which deal directly with MRO and engineering spares inventory. For more information visit www.InitiateAction.com  

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