Economic Order Quanity

 

Safety Stock Using Mean Absolute Deviation and Service Level

 If there is sufficient demand and forecast history available, you can use the mean absolute deviation method. This method compares the forecast to actual demand to determine forecast accuracy and, therefore, how much safety stock is required to prevent stock-outs. If the forecast has been very accurate in the past, only a small safety stock is required. The formula for safety stock using this method is:

safety stock = Z X (1.25 X MAD)

MAD is the mean absolute deviation of the historic forecasts from the actual demand. Z is the number from the normal distribution probabilities corresponding to the service level specified by the user.

 

Mean absolute deviation (MAD): Calculates demand using the mean-absolute deviation method. You must enter the service level percentage and forecast information. 

The Mean Absolute Deviation is calculated in three simple steps. 

1) Determine the Mean: Add all numbers and divide by the count 

example: the weights of the following three people, denoted by letters are 
A - 56 Kgs 
B - 78 Kgs 
C - 90 Kgs 

Mean = (56+78+90)/3 
= 74.6 
2) Determine deviation of each variable from the Mean 
i.e 56-74.6 = -18.67 
78-74.6= 3.33 
90-74.6 =15.33 
3) Make the deviation 'absolute' by squaring and determining the roots i.e eliminate the negative aspect 
Thus the Mean Absolute Deviation is (18.67 +3.33+15.33)/3 =12.44 

Alternatively , you can use the excel formula =AVEDEV(56,78,90) to obtain the result.