What is Safety Stock?
Safety Stock
One of the most, if not the most crucial aspect of doing business is its product stock. If there are no products left to sell, you won’t be doing business.
Ignoring this can be conducive to driving losses for a company. If you don’t have a specific product in your warehouse/store, customers can move on to another one and maybe not return to you anymore.
While it can be challenging to be in stock, safety stock can assist businesses in retaining the smoothness in the supply chain. Let’s take a deeper look into safety stock today.
Let’s define Safety Stock
So what is safety stock? Just what its name suggests! Safety stock is the stock kept in stores/warehouses by firms if they need to tackle any unexpected events. Some of which are :
- A sudden demand for a product
- Delays in shipment
- Lack of management in placing re-orders
- Shortage of funds
The main idea for safety stock to exist is to ensure that your business does not encounter stockout. Stockout is when you run out of your current inventory and have nothing to sell until other products are delivered.
Safety stock ensures that your supply chain is not disturbed even if you run out of stock supply.
Calculating Safety Stock
Now, if you’ve considered the idea of keeping safety stock for your business, first things first, congratulations because you’re one step ahead of stockouts now; you may have wondered as to how you can calculate your safety stock. You don’t need to do yet another google search now because we’ll be showing you how you can calculate your safety stock.
Calculating the safety stock doesn’t mean just keeping a few different products under your sleeve. In fact, several formulas are explicitly designed to determine the safety stock needed. We’ll go over two of them here.
1) The basic formula:
The most straightforward way of calculating the safety stock is to multiply the total number of items sold every day by the number of days you need the safety stock. For instance, you sell t-shirts.
In one day, you sell around 20 t-shirts and want three days’ worth of safety stock. Now you have to multiply 20 with 3, resulting in a safety stock of 60 t-shirts; variables (demand, lead time, etc.) are not included in this formula.
So it’s the best next estimate of how many products you need to keep in your safety stock, quite optimal for new and upcoming firms.
2)The max safety — average formula:
A max safety formula is a good option for shorter lead times. This is because the variable of longer lead time is not considered. It can help you calculate the amount (average) of products needed at any given time.
The formula works by subtracting the product of the average number of sales and lead time with the product of the maximum number of sales and lead time.
(Maximum sales * Maximum lead time) — (Average sales * Average lead time)
Is Safety Stock important for businesses?
Now that you’ve learned about calculating safety stock, let’s see if it’s a requirement for businesses or something that can be overlooked. To begin with, let’s take a look at some numbers.
Stockout alone is responsible for giving companies losses worth $984 billion in sales. Having a safety stock allows firms to :
- Steer clear from stockouts.
- Reduce the after-effects of disturbance in the supply chain.
- Compensate for any incorrect forecasts.
- Maintain customer satisfaction.
- Be more efficient
Businesses require safety stock to prevent/reduce any losses caused by potential losses and ensure customer retention.
Conclusion
We hope that you have a good grip of what safety stock is along with its importance by now. There are several ways and formulas by which you can calculate safety stock. The formula you choose will depend on your business operations and analytics, so it’s best to use safety stock software to automate the complex parts.
