It‘s insurance stock. Cannot be forget about them.

28 Июня 2014


I’m happy to again welcome you on pages of our portal. Today I would like to raise the subject of the importance of insurance stocks, to improve the quality of customer service. Determination of the appropriatelevel of reserves is one of the most important and most challenging tasksfacing logistics. If the level of insurance stocks too big - it blocks asignificant proportion of working capital. If you do not provide a sufficientlevel of insurance reserves - you come up with a permanent shortage of goods in warehouses.

Insurance reserves to prevent shortages. And short agesdue to factors such as fluctuations in consumer demand, inaccurate sales forecasts, variations in the timing of production and shipments of goods. Application of mathematical approach to determining the level of the reserve tobalance the conflicting goals of maximizing customer satisfaction and minimize cost of the company's goods in storage.

It should be noted that this article does not only reveal the mechanisms determining levels of insurance stocks, but would thesample solution, when period of time to delivery of goods considerably exceedsthe period of orders. This situation often occurs when a company sells imported goods and period of your order until the arrival of the goods at the warehouse of the company stretched into months.


Develop an IT solution to determine the level of the insurance stock of goods depending on the rank of the goods, the buyer's quality of service provided, when shoulder delivery of goods considerably exceeds the period of orders.

The functionality of this solution should include the ability to:

  • determine levels of insurance stocks and forecast sales of goods for the period of time for procurement;

  • comparative evaluation of projections in past periods and actual sales, for verification ofthe adequacy of payments projections and levels of insurance stocks;

  • display information in a tabular format, for further processing or in the form of graphs.


By tradition, I'll start with an example (Figure 1).

Figure 1 - Schedule to determine the level of insurance stocks and their verification by using the functionality of the described IT-solutions.

Insurance reserve is not intended to eliminate all possible instances of the deficit. More often choose a certain level of service quality. For example, 95%. For this choice in 50% of cases before the regular delivery of the insurance stock will not be involved at all, about 45% of cases involve the insurance reserve, and only in 5% of cases there will be product short ages (Figure 1).

Table 1 - Determination of the level of insurance stocks and their verification by using the functionality of the described IT-solutions.

Our right to choose the level of service. We will use them. Having earlier rankings, you might organize a differentiated approach to different levels of quality of service. Remember that the shortage of goods in group "A" (in our case it is Rank 1), will afford us much more painful than with the less populargroups "B" and "C". The following table 1 is responsible for the so-called index Z.

Table 2 - Dependence of Z-index of the quality ofcustomer service.

To understand the purpose of the index Z is to get acquainted with the table 2, which links the level of service and index Z. If the index Z = 0, it is means, that insurance stocks are not taken into account. However, stocks of the warehouse will be enough to meet 50% of cycles. If Z = 1, then the deficit will be eliminated in 84% of cases before the next delivery. The non-linearity according to the Z index of the quality of service. To ensurethe quality of service 99%, it is necessary to increase the level of insurancestocks in 2.33 times on 84%.

How is the insurance stock? More often take into account are two components of the insurance stock of: first, take into account fluctuations in demand, the second takes account of fluctuations in the supply periods (Formula 1).


where Z – index Z, shoulder delivery - the period between ordering and the arrival of the consignment at warehouse; period of supply - the frequency of placing orders in manufacturing; DD - dispersion of demand, statistical value, which takes into account the variation of demand relative to the mean of the; DS - dispersion of supply, statistical value, which takes into account the variation of demand relative to the mean of the; MDF - mathematical demand forecast, mathematical forecast (the average value of) demand goods.

To calculate statistics, you must choose a period ofstudy of demand and supply in such a way that the sample was not less than 5 values (for example, 5 months supply or 5 months sales).

Go back to the example. Table 1 divided into 2 parts: the period inwhich an earlier calculated predictions and insurance reserves (left) and new projections for the planning period and insurance stocks on topical at themoment (right). For each rank, and hence the goods sel ected the required level quality of service. For rank 1 – Z=1.65, 2 – Z=1.00, and for rank 3 – Z=0.00. Also shows, in different periods the good scan be assigned different rank, which leads to a change in the level of insurance stocks because of changes in the quality of service. In the table reduced information about number of deliveries, dispersion of supply and demand, as well as the level of the insurance stock and its overall value. In our case, the time of delivery is 6 months supply, and the period of procurement is 1 month. Graphical representation of tabular data is divided into two periods. Only for the period of verification below shows the actual remains of this period. Very good this is reflected in the largest jump residues at the interface between product verification and planning periods.The fewer such races, the rather calculated predictions and insurance stocks in the past. To control redundancy in reserveson the charts shows the current forecast for the month (blue color). Ideally, stocks should be changed in the blue zone only occasionally stepping into thered zone. The presence of the yellow zone said about the redundancy of stocks, and its minimization is the main objective of the Logistics Department.


Thus, the decision enables the Logistics Department:

  • determine the level of insurance stocks;

  • to assess past projections and actual sales and settlement levels of adequacy of insurance;

  • to display the information in tabular form, for further processing and easy readable formgraphs;

  • planning procurement, taking into account the current insurance stocks, in terms of minimizing the cost of the company's goods in storage.

And again, I await your comments (registration required). Thank you.

Dmitry Kalchenko.

Translation from Russian Tatyana Kalchenko.

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