Prevent inventory shortages: How do you use safety stock?

1 What is safety stock?

Safety stock is the buffer inventory you maintain above your normal or forecasted demand. It helps you cope with fluctuations in demand or supply that are beyond your control, such as seasonality, promotions, weather, supplier delays, quality issues, or transportation problems. Safety stock can also protect you from stockouts due to inaccurate demand forecasting, inventory errors, or theft.

2 Why is safety stock important?

Safety stock is essential to reduce the risk of stockouts, which can have detrimental effects on your business, such as lost sales and revenue, frustrated customers, and a weakened brand image. Stockouts can also lead to lower customer loyalty and retention, higher customer acquisition costs, and a reduced market share and competitive advantage. On the other hand, safety stock can help maintain service levels and customer satisfaction, which are essential for your business performance and profitability.

3 How do you calculate safety stock?

Calculating safety stock requires certain variables, such as the maximum daily demand (MDD), average daily demand (ADD), lead time (LT), maximum lead time (MLT), and average lead time (ALT). A common and simple formula for safety stock is: Safety stock = (MDD x MLT) - (ADD x ALT). This assumes that demand and lead time are normally distributed, and that you want to achieve a 95% service level, allowing you to meet 95% of the demand without stockouts.

4 How do you use safety stock?

Once you have calculated your safety stock, you need to use it effectively to prevent inventory shortages. To do this, monitor your inventory levels regularly and compare them to your safety stock levels. If necessary, adjust your safety stock levels according to changes in demand or supply patterns. For instance, if you anticipate higher demand during peak seasons or promotions, you may need to increase your safety stock. However, if you find a more reliable supplier or improve your forecasting accuracy, you may be able to reduce your safety stock. Finally, review your safety stock performance and evaluate its impact on your inventory costs and service levels. Metrics such as inventory turnover, fill rate, stockout frequency, and holding costs can help measure the effectiveness of your safety stock.

5 What are the benefits and drawbacks of safety stock?

Safety stock can have both positive and negative effects on your business. The benefits of safety stock include avoiding stockouts, improving customer satisfaction, increasing sales and revenue, enhancing your brand image and reputation, and gaining a competitive edge in the market. However, safety stock can also increase inventory costs, such as storage, insurance, obsolescence, and opportunity costs. Additionally, it can tie up working capital and reduce cash flow. Furthermore, safety stock can create a false sense of security and discourage you from finding the root causes of demand or supply variability.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?