Safety Stock Definition, Importance, Formulas & Implementation

Additionally, safety stock can help to protect against inflationary cost increases. Safety stock helps to address variability in your supply chain and demand, so supplier lead time should not impact your safety stock, only your cycle stock. You should always safeguard your inventory by looking at the standard deviation time.

Forecasting can only get you so far because there will always be occasions when customer demand surges unexpectedly. Under these circumstances, your safety stock can replenish the shelves while you await your next order. Similarly, sudden shortages of products, parts, and raw materials can lead to price surges as demand increases. If you have sufficient safety stock, you might be able to avoid purchasing goods at a higher cost. Cogsy integrates your previous sales data, purchasing trends, and seasonal analysis into one convenient and comprehensive platform.

What is Safety Stock and How Can Businesses Use it to Ensure Continuity?

Having ‘backup’ stock ensures you can take advantage of an increased sales opportunity, and avoid turning away customers due to stock-outs. Unfortunately, determining a sufficient quantity of safety stock inventory isn’t simple. There are different formulas that must consider exceptions unique to each vertical and even retailer – which we will cover later. Fixed safety stock is a predetermined number of units you keep as safety stock for each item. Retailers use their sales numbers from recent months to determine a fixed amount of safety stock to hold.

• More simply, it’s a predetermined number of buffer units you keep for each individual SKU.
• In each of these scenarios, organizations depend on something called safety stock to enable business continuity.
• Before you choose the right formula for your safety stock you must first consider the quality and quantity of your data.
• There are a few different factors keep in your consideration that may vary formula to formula that you use.

However, this can be an expensive and time-consuming approach, so it is more common to set a fixed safety stock level, and review the adequacy of this level from time to time. Pareto analysis can be employed to revise safety stock levels on a more frequent basis for only the most heavily-used inventory items. The basic safety stock formula is a good place to start if you’re unsure about the more advanced methods. Those basic calculations can give you a ballpark idea about how much safety stock you might need — especially when specific variables about your inventory and lead times are unknown. Safety stock is a buffer that protects businesses from unexpected demands.

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In addition to collecting this data, Cogsy goes the extra mile by sending automatic replenish alerts for your entire product catalog. Not only do these low stock alerts optimize your purchasing workflows, but they help prevent stockouts at the same time. Because Cogsy’s operations platform looks after your stock levels 24/7, it knows precisely when your inventory is running low and when it’s time to restock your warehouse.

These expedited fees will undoubtedly impact your bottom line, seeing as increasing the costs of goods sold (COGS) consequently lowers your margins. Inadequate product availability (like when you run out of stock) isn’t exactly a good way to earn your customers’ favor or improve your reputation among potential buyers. If you are an omnichannel retailer there are many factors to consider, such as, where inventory is stored, inter-store transfers, inventory returned to the store, and so on. Are you just looking to avoid as many out-of-stock as possible, or save on storage costs? The dreaded one-size-fits-all approach to calculating optimal stocking level formulas.

Replenish stock at the right time

And by knowing your reorder point, you can make sure you have the inventory you need on hand when you need it. The general formula is a simple mathematical equation used to calculate the amount of inventory a company should maintain to minimize the risk of stockouts. The percentage of client orders that can be filled without running out of inventory.

• Just keep in mind that this method doesn’t acknowledge stock while it’s in production and not yet ready for sale.
• The reason for this is that safety stock levels are going to be specific to the retailer, the business, and service level expectations.
• The safety stock formula is there to prevent the majority of stock-outs, but not all of them.
• However, it can give very poor results going in the other direction — where PC is less than T1 — especially when the time parameters are small, such as when going from weeks to days.
• An inventory system can also alert you to when it’s time to reorder stock.

Backorders are a saving grace if and when stockouts occur, which can happen when launching a new product or even a new brand (since there’s no historical data for you to lean on). In most cases, inventory becomes obsolete after a certain amount of time has passed (and the items remain unsold) or when a unit gets broken slash damaged during the warehousing process. That’s why it’s so necessary to find a stock formula that works well for your brand, so you can make smarter purchasing decisions and avoid overstocking any items.

Businesses That Have Successfully Implemented Safety Stock:

Safety stock ensures you’ll be able to keep your customers happy and coming back for more, no matter what disruption your supply chain is facing. The more inventory you store at your warehouse (and the longer it’s housed there), the more holding costs you’ll have to pay. Meaning, if you’re carrying more safety stock than you need, your holding costs will continue to compound the longer those products go unsold. As was true with the standard deviation formula,  Z indicates your desired service level while σLT again represents the lead time deviation. Feel free to reference the first formula on this list for more information on calculating Z or σLT. The simplest method to calculate safety stock is to decide how many days of inventory you would like to have available on hand and multiply that by the number of daily products sold.

Having a solid brand image will require you to keep a close eye on your inventory levels and pull out your safety stock as needed. That’s because roughly 70% of apparel brands, for example, will recommend substitute products to try and save the sale when they don’t have safety stock https://online-accounting.net/ on hand. According to the 800 consumers surveyed by Lucidworks, 76% of shoppers are happy to purchase an alternative item (though 69% also said they’d also do so with a competitor). That is, it’s the time (in days) from when an order is first placed until it’s ready for delivery.

Basic Safety Formula

This will help you determine your service factor based on the service level you want to reach. Z is the desired service level, σLT is the standard deviation of lead time, and D avg is the demand average. When dealing with uncertainties and multiple variables, the best way to calculate safety stock is to use standard deviation to determine variations in supply and demand. The definition of standard deviation is a quantity calculated to indicate the extent of deviation for a group as a whole. There are a number of software programs available that can help you manage your inventory and safety stock levels.

Instead of making a blanket rule that you need buffers for every item in your inventory, it’s better to be strategic about it. Here are some reasons why having safety stock may not be the best option for your business. Sourcing from local suppliers will mean shorter lead-times and a subsequent reduction in safety stock levels. It’s important to carefully calculate the amount of safety stock you need when you place an order with your supplier. If you mistakenly order extra stock, you’re likely to reduce available cash, increase your holding costs, and accumulate obsolete or spoiled SKUs. The Heizer & Render’s safety stock method also incorporates the standard deviation of lead time distribution.

And while calculating safety stock can feel a bit daunting, Cogsy can help remove uncertainty from the equation. Thanks to real-time tracking, forecasting features, and replenishment alerts that is. It is buffer inventory that is kept to ensure that a company can continue to meet demand even if unexpected events occur, such as delays in deliveries or unexpected increases in demand. This means you can ship customers’ orders on time and maximize sales while ensuring your supply chain process is streamlined economically.

It ensures that your company doesn’t run out of popular items and helps you keep fulfilling orders consistently. If your average and maximum daily sales haven’t changed in years, but the supplier’s lead time tends to fluctuate, Heizer word receipt template and Render’s formula might suit you best. Use Shopify POS to forecast demand and calculate safety stock to protect against costly stockouts. But if the lead time is already long, that product might be out of stock for months.