Inventory management is tricky for any business, and knowing how much stock you should keep can be hard. On the one hand, too much overstock can cause you to lose money and crowd your warehouse.
On the other, too little stock means fewer sales and unhappy customers. In addition, you can’t always calculate demand to an exact decimal, and unforeseen events like supply chain blocks can interrupt your inventory management.
That’s why companies keep safety stock to help mitigate these risks and ensure they always have the right amount of inventory. Learning more about safety stock and implementing it in your warehouse or storage area can help you prepare your business against unforeseen events and keep your customers happy.
What Is Safety Stock?
As implied by the name, safety stock is stock that’s meant to keep your business safe. It’s overstock of an item that you can use if you go through your normal stock.
That way, you can keep up with demands and satisfy your customers in case there is a sudden spike in demand or delays in the supply chain. You should always use the safety stock formula to determine the proper amount.
This is typically wiser than if you were to buy a lot of overstock. Ultimately, it will help your business save money and keep your warehouse or inventory room from overflowing.
Calculating Safety Stock in Supply Chain
A business should have enough stock to adjust to increased demands or delays, but you also need to keep your inventory space clean and organized. This formula can help with safety stock calculation:
z LT D avg
In this equation, z represents your desired level of service. LT is the standard deviation of your lead times, and D avg is your demand average.
If you don’t have a long lead time, you can also use this simpler safety stock formula:
(Maximum amount of sales x Maximum lead time) / (Average amount of sales x Average lead time)
What Is a Good Safety Stock Level?
A good safety stock level will vary per business, depending on their average amount of sales and their lead time, so it’s best to do a safety stock calculation to find your business’ ideal safety stock amount. However, a general rule of thumb is that you want about two weeks’ worth of inventory kept on hand at all times.
Why Should Companies Keep Safety Stock?
Safety stock aims to mitigate delays in the supply chain, satisfy increased demand and lead to an overall more efficient and profitable business. If you don’t have safety stock, your business may flounder when unforeseen circumstances arrive.
If your business is prepared to adapt to changing demands and issues in the supply chain, you’ll set your business up for success. Without any safety net, you won’t be able to conduct business as usual in the event that something changes. Your business will be able to stay productive for a longer time, especially if widespread shortages and price increases arise.
Avoid Running Out of Stock
If your business sells products, then running out of stock can be extremely detrimental to your business. If you can’t sell products, your business won’t make money, which creates difficulty in terms of paying your expenses or yielding a profit.
However, when you have safety stock on hand when shortages arise, you’ll be able to continue selling your products. This can make your business more competitive since you’ll have products that are out of stock in other places.
The goal in business is to have every customer you do business with you be satisfied with the service they receive. That’s harder to achieve when your business is experiencing severe or prolonged stockouts.
Satisfied customers come back for additional orders, tell their friends about their positive experience and leave favorable reviews, all of which are essentially forms of marketing. However, in order to ensure each and every customer is happy with their experience, you must prioritize the prevention of stockouts. Safety stock can help you keep your customer happy by meeting their demands for longer.
Safeguard Against Demand Spikes
Typically, you can figure out the average demand for a product per month to ensure you always have the right stock on hand. However, you can’t always plan for demand spikes.
Sometimes customer demand increases exponentially with no warning signs, whether it’s caused by a world event, natural disaster or other phenomena. You can’t always predict them, so it’s best to prepare in case they happen. By keeping safety stock on hand, you’ll have the inventory to match this demand increase while waiting for more inventory.
If you don’t keep safety stock, any increase in demand or delay in the supply chain can lead to a stockout. Stockouts are terrible for a business since they mean you make less money and do not satisfy your customers. Safety stock mitigates the risk of a stockout since it safeguards your business from any fluctuation in supply and demand.
Fixed Safety Stock, Buffer Stock, or Safety Stock?
Safety and buffer stock essentially refer to the same thing — extra inventory to prepare for unexpected changes in supply or demand. Buffer stock can refer to additional stock meant to protect against changes in customer demand.
Safety stocks are sometimes used to refer to the extra inventory to protect against changes in the supply. They are similar concepts but can refer to different ends of the supply-demand process.
They are often used interchangeably. Additionally, there are also two different types of safety stock: fixed and unfixed.
Fixed safety stock is a set amount of safety stock determined to be the right amount for your business. This safety stock usually doesn’t change, whereas unfixed safety stock can easily be adjusted to meet changing supply and demand.
Why Is Safety Stock Important in Inventory Management?
Inventory management is the core of any business. It’s how you keep your business moving and satisfy customers. But inventory management isn’t an exact science, and you can’t always change your supply on a moment’s notice to match increased demand or delays in the supply chain.
Safety stock makes inventory management easier, by preparing for changes in the supply or demand of a product. It’ll allow you to continue stocking and selling necessary products to keep your customers happy and your business profitable, even amongst shortages and delays.
Drive Success With a Prepared Business
Some businesses use a just-in-time inventory model, which means they get just enough stock to meet their demands. Some claim this helps keep inventory costs low, but it also means there is absolutely no margin for error.
If there is a delay in the supply chain or even a slight increase in demand, the business cannot keep up and is therefore unable to make money. Safety stock may increase your inventory cost, but it will help your business in the long run.
You can’t rely on the supply chain to always be a well-oiled machine, and there is bound to be a time there is a delay in shipment or shortage. With reserved safety stock, your business can adapt immediately and still provide stellar service to all of your customers.
By preparing for the unknown, you are setting your business up for success.