What would happen if there was a sudden spike in market demand for your products?
Would you have enough inventory to satisfy your customers?
Or would you have to hang up the dreaded “out of stock” sign?
If you’re unsure, then you probably need to invest in safety stock inventory.
Even if you think you could handle that type of situation, your business is still vulnerable to uncertain shifts in the market and supply chain.
One of the best ways to safeguard your business and satisfy your customers is to have safety stock inventory.
We’re going to go over some of the benefits of safety stock and show you how to use one simple formula to calculate it.
But first, let’s define safety stock inventory.
As the name implies, safety stock inventory is a small, surplus amount of inventory you keep on hand to guard against variability in market demand and lead times.
If you’re trying to implement just-in-time (JIT) inventory, then you probably won’t want to invest in safety stock.
But, if you’re like the majority of retailers and wholesalers who use a just-in-case (JIC) inventory strategy, safety stock is critical to your business operations and offers many benefits to your bottom line.
Safety stock plays an integral role in the smooth operations of your supply chain in various ways.
Here are just a few:
You probably noticed that the benefits of safety stock are all tied to mitigating problems that could seriously harm your business.
That’s because without safety stock inventory you could experience:
With safety stock, you can safely avoid most of these problems.
This is why it’s crucial to know how to order just the right amount to safeguard against variability in the market and supply chain, while not ordering too much and risk losing capital over the long-term.
To get it just right, let’s look at how to calculate safety stock inventory using a proven formula.
A safety stock formula is relatively straightforward and requires only a few inputs for calculation.
Here’s the formula we recommend using if you’re just starting out:
(Max Daily Sales x Max Lead Time in Days) – (Average Daily Sales x Average Lead Time in Days) = Safety Stock Inventory
To take this out of the abstract and show you how it works, here’s an example to demonstrate this formula:
Suppose there’s a store in the USA called Harry’s Honey Shop. Harry sells honey that’s imported from Brazil.
On average, he sells about 5 bottles of honey every weekday. On the weekends, he operates a stand at his local farmers market and sells about 10 bottles of honey.
His average lead time to get a fresh shipment of Brazilian honey is 40 days. Although, because of the limited availability of flowers and other environmental factors, it can take up to 50 days to receive a shipment (maximum lead time).
If Harry wants to make sure he always has enough honey in stock to satisfy customer demand, he can use this formula to figure it out:
(10 x 50) – (5 x 40) = 300
If Harry sells about 45 bottles a week (5 every weekday, 10 on the weekends) equaling 180 bottles a month, then with these calculations he would have enough stock to last him about a month and a half.
If Harry orders honey every month, he would have plenty of safety stock. Maybe even too much.
Now that Harry knows how much honey he needs to have, and how much extra he would probably have left over, he can slightly reduce the amount of honey he orders to guarantee a nice buffer in case there’s a spike in demand or longer lead times.
Now, this is a pretty basic safety stock formula that will get you up and running quickly. But, you should never solely rely on basic formulas like these to calculate safety stock.
Use them as a baseline, test them, and expand your calculations with more nuanced formulas to deal with large volumes of inventory, different types of stock, and volatile market demands.
If you want to dive deeper into safety stock formulas, you should check out this excellent article that will help you handle more complex variances, deviations, and variables in your calculations.
A safety stock formula is only useful if you have accurate inventory metrics.
If you don’t have an effective SCM software, a successful stocktaking process, or a proven perpetual inventory system, then you run the risk of having inaccurate forecasts, inefficient stock counts, and error-ridden data.
Before you can optimize your inventory ordering process and factor in safety stock, you should upgrade your inventory management system.
Our cloud-based inventory management software will track all your sales, generate real-time reports on buyer behavior, forecast spikes and slumps in demand, and monitor every piece of inventory the moment it arrives and the moment it’s used or sold. If you want to reap the rewards of safety stock inventory, then you should invest in a powerful inventory management system.
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