What is Safety Stock? Definition, Formulas, Best Practices

If your average is 100 units daily, but you’ve sold up to 150 units in a day, you would use 150 as your maximum daily usage in the calculation. A simple formula may work if you are a smaller retailer, or if you have especially consistent sales levels. However, with every additional sales channel, vendor, and inventory increase the complexity of safety stock grows. Unlike the Heizer Render formula, Greasley’s method takes demand fluctuations into account. The Z score, also called the desired service factor, is a way to decide how confident you want to be about having enough stock. It is a value that you select so that you don’t face a stockout scenario.

So, if lead times are 5 days but you would like to keep a few days extra stock just in case then the second figure would be more like 7. The percentage of inventory that should be safety stock will vary from business to business. For most businesses, about 50% of the average amount of inventory you use during your reorder lead time is a sufficient amount of safety stock. The success of your ecommerce business depends on getting your products into your customers’ hands quickly and easily. You want to maximize sales, deliver orders on time, and provide an experience that drives customers to leave you glowing reviews.

• When these events inevitably occur, safety stock gives you some emergency padding.
• Plus, well-managed safety stock can boost your brand’s image by providing reliable, reputable service to your customer base.
• Thankfully, safety stock lives up to its name by safeguarding against these steep price fluctuations.
• You can use historical point-of-sale (POS) system data to figure this out.

In this way, safety stock allows the business to keep making sales and bringing in revenue while waiting on more inventory from their manufacturer, all without ever stocking out. However, while the business waits for the next shipment of inventory to come in, customers continue to place orders. Before long, the business has sold through its entire regular inventory — but the replenishment shipment has not yet arrived.

How inventory control systems simplify retail inventory management

The basic safety stock formula simply takes the average sales per day along with the number of stock days you feel you need to keep stock of. Getting the right safety stock formula can be the basis for an effective inventory management system. Some inventory management softwares include automatic reorder notifications that alert you when a SKU has hit its reorder point  of your choosing.

Let’s say one of your popular products goes out of stock and customers keep asking for it. If the lead time with your supplier is short, meaning you can get new inventory in mere days, this is a small issue. Safety stock is extra inventory retailers hold to prevent stockouts in case of an issue in the supply chain or an increase in demand.

Safety stock enables a business to fulfill orders even while waiting on a replenishment shipment to arrive. This way, operations can continue and a business can keep selling without supply chain delays slowing down productivity. For example, if you know that every Cyber Monday you double your online sales, you can effectively calculate how much safety stock you should have on hand for upcoming holiday inventory prep. That way, you won’t risk losing out on sales on one of the hottest buying days of the year.

Reasons for Carrying Safety Stock

This can help you adjust your reorder point or safety stock levels down the road. It’s always best to analyze your stock movement regularly and optimize as often as needed. To calculate safety stock in Excel, use the formula (Z-score x √lead time x standard deviation of demand) + (Z-score x standard deviation of lead time x average demand). Luckily, there’s a way to calculate and manage your accounts receivable journal entries safety stock automatically. A third-party logistics (3PL) provider, like ShipBob, can provide you with real-time tracking of stock levels and formulas to set reorder points and safety stock. Using historical sales data, we can help you calculate your ideal reorder quantity and how much safety stock you need to avoid stockouts, while storing your inventory and fulfilling your orders.

Review it at regular levels so that you can limit the amount of your holding cost. Here is a simple free calculator to determine your optimal safety stock level. You’ll have extra materials on hand, and you’ll use your excess inventory to keep things running smoothly.

Inventory

But on top of that, anticipation inventory can also protect you against rising materials costs (or a shortage of materials altogether). This makes anticipation inventory a good way to save money, since your preparedness helps you avoid price gouging and keeps your bottom line intact. Anticipation inventory is similar to safety stock in that both strategies help retailers tackle changes in supply and demand. Essentially, companies purchase and store this inventory in preparation for an anticipated future event — like a seasonal jump in sales or a forecasted increase in the costs of goods. Almost any company that sells physical goods should make use of safety stock.

Demand Forecasting

Thankfully, prioritizing safety stock is one of the best ways for DTC brands to avoid stockout situations altogether. Typically, businesses keep anticipation inventory to meet a predicted increase in demand or price. That is to say, they foresee a surge in seasonal demand or supplier pricing, and they stock anticipation inventory to better prepare for these circumstances. Before you begin implementing safety stock, consider how well established your business is.

Safety stock is used as a buffer to protect organizations from stockouts caused by inaccurate planning or poor schedule adherence by suppliers. As such, its cost (in both material and management) is often seen as a drain on financial resources that results in reduction initiatives. The lower the service level, the lower the requirement for safety stock. The purpose of safety stock is to ensure that a company can continue to fulfill customer orders even if there are disruptions in the supply chain. It is calculated based on factors such as lead time, demand variability, and desired service level. By maintaining an appropriate level of safety stock, a company can reduce the risk of stockouts and ensure that it can meet customer demand even in the face of unexpected events.

By having the proper amount of safety stock on hand, you can avoid catastrophic out-of-stock issues, ensuring that your customers get what they need when they need it. Similarly, if it has taken as long as 10 days to restock inventory (even though the average is 5 days), 10 would be the maximum lead time for your calculation. Using a safety stock formula helps retailers figure out a ballpark quantity of safety stock.

Too Much Safety Stock

With such an array of formulae to choose from it can be hard to decide which method to use. The quality of data, along with the characteristics of the stock movement will largely define which to use. The relationship is nonlinear and the higher the % required results in a disproportionate amount of Z score, and thus safety stock, required. Different business types operating in different sectors have different demands on their inventory and cash flow. However, for accuracy and precision, retailers use more advanced solutions like analytics software to account for their business-specific factors.

Sure-Fire Ways to Reduce Operational Costs

This is a very simple way of calculating the safety stock and is relevant for those that do not have variable sales and for products where the safety stock levels are not that critical. What qualifies as good safety stock (or a good amount of safety stock) will depend on a business’s maximum and average sales and lead times, as well as the nature of the SKUs in stock. Establishing omnichannel visibility across order and inventory channels is crucial to prevent overselling. With the right software, you should be able to view inventory levels across channels and locations in one place, making it much simpler to manage sales and avoid stockouts. 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. The reason for this is that safety stock levels are going to be specific to the retailer, the business, and service level expectations.

Businesses can use EOQ to meet demand while reducing the costs of ordering and holding inventory. Safety stock refers to the products held in reserve in a business’s inventory. Companies use this method to protect against stockouts or sold-out products and mitigate the fluctuating supply and demand risks. A high service level means you’re keeping the right number of items in stock, while a low service level means you aren’t stocking enough to meet demand. Safety stock protects against stockouts, and with the current state of the supply chain, stockouts have been top of mind for merchants and consumers alike.

Stockouts can happen to all sorts of ecommerce companies, but some challenges make a business even more vulnerable to them. It’s worth noting that safety stock should be for an interim increase outside of the demand you’ve forecasted — not an additional full year’s worth of inventory. Safety stock is the excess product you keep on hand in case of an emergency or supply chain failure that causes less than average inventory to be available. This means you can ship customers’ orders on time and maximize sales while ensuring your supply chain process is streamlined economically. Your data should reflect these and all relevant factors that influence inventory levels.

Letting safety stock go to zero is clearly a highly effective way of cost reduction. This negates any complicated division of stock into differing groups dependent on their characteristics. Across a large range of stock that may be held by e-commerce businesses this can become cumbersome and counterproductive.