Hoarding? Or would you consider it safety stock?

It is something that we have probably all done at one time or another…hoarded. I think that we all know what it is. Have you gone out to an operators tool box to find a cache of parts that they might use, or possibly a supervisor that keeps a bunch parts in their desk drawer because they ran out of them once…7 years ago. According to Webster, it is pretty simple, it is the practice of collecting or accumulating something. When we use this straight up definition, that would make my Grandmother a hoarder. I remember going into her house and seeing all the Hummel figurines. They were all over the place. On the mantle, on the coffee table, on the counter, she even bought special cases where she could display her “really valuable” ones.

What do you think of when you think about hoarding? The television show Hoarders? Where a crew goes into a house that does not have a flat surface that is visible because of all the “stuff” (junk) that is all over the place. They then try to get the owners to part with the stuff that is sitting everywhere you move. Probably what most of us think about now, because it is so fresh in our memories, is the lack of being able to find toilet paper at the local store. Have we all started going to the bathroom 300% more times per day, thus creating the environment where we are all using 300% more toilet paper. I will grant that when everyone is at home, we may be going to the bathroom more frequently out of boredom, but not to the tune of 300% more. Now I do not know if the demand reached 300% more during this time of toilet paper hoarding, but I do know that I could not go into one store where I could find one roll of toilet paper on the shelf. It really makes you think, if everyone just continued to buy what they normally buy, would we have been put into this position? I think, probably not.

A Shortage of Steel

This makes me think back on a situation where I was working in several plants that utilized rolls of steel as their primary raw material (hmmm, very similar in look to a roll of toilet paper, could there be a connection?). The great bulk of the steel that they were using came from Japan, and, low and behold, there was a shortage of steel coming from Japan. I believe it was due to an earthquake that damaged their infrastructure. I had heard about this shortage, but had not witnessed it firsthand. Until I went to visit one of the stamping plants. Before going out onto the manufacturing floor, we discussed the state of the plant. We spoke about the steel shortage and I was informed that they had taken some action to make sure that they would still be able to produce, so it might be kind of crowded when we walk the floor. As I would soon find out, the steps they had taken were to order as much steel as they could get their hands on. As we walked onto the floor, there were rolls of steel everywhere. So much so that the material handling drivers had to re-route because some aisles were completely filled with rolls of steel. So this is what a steel shortage looks like.

In another plant, completely different company, not even in the same industry as the one that I had previously been in, I witnessed the same thing. Aisles that were normally used for transporting materials to and from the line, were filled to overflowing with rolls of steel. Oh course, my question of why they had so much steel, was met with a incredulous look and the comment…”Don’t you know there is a steel shortage”.

Could Safety Stock Have Helped The Situation?

Usually when hoarding is involved, all bets are off. It is difficult, if not impossible to forecast. However, when the normal day to day breakdowns of machinery and mis-counting of inventories is what leads to the variations, it can usually be handled with safety stock. What exactly is safety stock? Most people will reply…it is to handle unknown situations. More specifically it is to handle the variations in supply and demand. So, how much safety stock do you need to carry in order to be able to handle all the situations that could pop up, like a steel shortage…or a run on toilet paper.

There is Not Enough Space in Your House/Plant

There is no amount that could handle all of the situations that could occur. Can you imagine every household having that amount of toilet paper on hand. Occasionally something like this happens and it completely disrupts the supply chain and you just have to react as best as possible. There are things that you can do that would help to mitigate the majority of these situations, and those include having a safety stock that will cover the majority of these occurrences.

How Much is Enough?

There is a calculation that will cover you a theoretical 2 sigma, or 95% of all situations. Is 95% enough? That is up to you. Here is that calculation.

In words this says, take the deviation in supply squared add this to the deviation in demand squared, and take the square root of that number. The result would be the amount of safety stock you would need to keep. This is not so cut and dry, though. At its basic level, if your customer gave you advance notice that they were going to take 100 and they took 120, this would be a deviation in demand. If you schedule your assembly area to supply you with 1000, and they only supplied you with 900, this would be a deviation in supply. At the risk of repeating myself too many times, safety stock is to handle the deviation in supply and demand. This is just a theoretical calculation, you will still need to understand the situation and not just let the data dictate what you do. But in order to get to the theoretical number you need to have all of the above information.

Here is an Exercise

Every time that I establish safety stock, whether it be by a calculation, or by some other means. I will always run through a simulation. I will put all of my desired stock into inventory, and run a day by day actual from the last quarter. What came into inventory and what went out. This would then be an actual based on if you had a certain amount of inventory. In this manner it is very easy to see, what situation would drive you to a shortage. This also helps in establishing the amount of space that is required to store that particular finished good.

When does Safety Stock Become Hoarding?

But how do know when you are actually looking beyond the data and when others are becoming irrational? When can you tell you have slipped into the hording phase? Again a simulation may help. If you walk through certain scenarios it can become obvious that things have gotten out of control.

For example, if a family of 4 decides to order 1000 rolls of toilet paper, a quick simulation may suggest they would have enough to last 1,750 days (assuming 1 roll per person per week), you might be a hoarder.