I have done this the last 2 times I changed jobs. It worked out well for me both times. If you are considered to be a valuable employee, and you have management that is the least bit competent, you won't "just be replaced" for looking around. Why would they trade you, an employee who has proven herself to be valuable, for someone who just might be adequate? Also consider that we currently have a talent crunch on. No company with high standards for engineers is able to hire as many as they would like to.

It is a great idea to tell your employer that you're looking around, because it frees you to tell friends and former colleagues that you are looking for a job without having to worry that your employer will find out. In my experience you can get great job leads this way. This also gives you the opportunity to control the job search process such that you have multiple offers available at once, which improves your leverage.

When I do this I let every company that I am interested in know that I have a deadline by which I need to receive a job offer or not. Typically this deadline is my search start date + 1 month. After that I have a 2-week negotiation window, at the end of which I will accept 0 or 1 new jobs. This gives me a lot of leverage in soliciting counteroffers and minimizing stupid recruiter games like exploding offers.

Do be aware that if you follow this strategy some recruiters will bitterly resent you. This is because they know exactly what you are doing and how it minimizes the informational asymmetry that is one of their most important weapons.