If your business is into eCommerce, food distribution, consumer goods, or any other industry that deals with product inventories, you must be constantly struggling with the challenge of maintaining sufficient stock levels.
If an in-demand product is mostly out of stock at your warehouse, buyers will get frustrated and start looking elsewhere. Running stocks too low can, therefore, cost you customers as well as money, so it's necessary to keep extra inventory—i.e., safety stock—to manage customer demand efficiently.
In this article, we'll discuss why your business should maintain safety stock. We’ve also created a calculator to help you determine how much safety stock to keep. But first, let's understand the basics of safety stock in inventory management.
Safety stock is the extra product inventory companies keep on hand to reduce the chances of stockouts.
It acts as buffer inventory in case demand becomes higher than expected or your supplier fails to deliver items on time. Maintaining safety stock helps ensure you don’t run out of products due to supply or demand fluctuations.
Let’s discuss the four main reasons why your business should be maintaining safety stock in the inventory.
Unexpected shifts in market dynamics due to shortage of raw material, entry of new players, changes in government policies, etc., can lead to higher-than-usual prices. As a result, you may have to pay more for purchasing raw material or for upcoming deliveries from your sellers. In such situations, safety stock will save you from the trouble of purchasing items at inflated prices.
If products are mostly out of stock at your warehouse, you’ll have to deal with loads of frustrated customers, which is also highly likely to damage your brand image. What’s worse—customers may even turn to your competitors. Market data suggests that out-of-stock products are one of the top reasons shoppers exit retail stores in the U.S.
But with ample safety stock in your inventory, you’ll be able to meet customer expectations without hampering your sales numbers. Your customers will keep coming back, and your brand reputation will remain intact.
Sometimes the demand for products increases unexpectedly. For instance, a pandemic could lead to panic buying among customers, or the festive season could result in stocks depleting quickly. A fixed safety stock will help you manage such demand volatility. You won’t have to turn away customers due to stockouts or depend on your suppliers to deliver items at short notice.
Supply chain disruptions such as natural disasters, transportation failure, or unavailability of raw material can hit even your suppliers. That means delays in procurement and delivery. With ample safety stock, your business will not suffer from inventory shortage during such unexpected disruptions. You’ll have buffer stocks to meet sales needs in case shipments are taking longer than expected.
The one-size-fits-all approach doesn’t apply to safety stock. Based on various demand and supply factors, different products have different safety stock levels. We’ve created a safety stock calculator that lets you measure how much buffer stock to maintain at all times. The step-by-step calculation is explained below:
Step 1: For any given product, multiply its maximum daily usage (in quantity) by its maximum lead time (in days).
Step 2: Multiply the product’s average daily usage (in quantity) by its average lead time (in days).
Step 3: Calculate the difference between the two to determine the product’s safety stock level.
Safety stock level = (Maximum daily usage x Maximum lead time) – (Average daily usage x Average lead time)
Here’s an example to make this less complicated.
Let's assume you have a coffee mug selling business in Texas, and your supplier is in Florida. You sell about 100 mugs a day (average daily usage), but on good days, sales can go as high as 150 (maximum daily usage). On average, it takes your supplier about 10 days (average lead time) to get the coffee mugs delivered to Texas once you place an order. But Florida receives frequent thunderstorms, and the roads are not always reliable. This sometimes results in longer lead times, up to 20 days (maximum lead time).
Using our safety stock formula, the calculation is: (150 x 20) - (100 x 10) = 2,000.
This means you should have an additional 2,000 pieces of mugs as buffer stock at all times.
Our safety stock calculator is available as a downloadable template, so you don’t have to do all the calculations yourself. Simply make a copy of the template and enter your details.
You may ask: When does safety stock become excess stock? We agree there’s a thin line between buffer stock and excess inventory, and that line can be hard to identify. But with the right technology, you can master the art of safety stock calculation.
Use inventory management software to monitor existing stock levels and prevent pileups. An inventory manager will automatically streamline processes to accommodate supply or demand fluctuations better. You can define the minimum stock level for different products and receive alerts when your inventory becomes lower than the defined level.
With an inventory management system, you can also set up automated product reordering. Every time the inventory level falls, the system will automatically create and process new purchase orders, saving you time and manual effort.
Visit GetApp’s inventory management software directory to check out tools rated the best by real buyers. You can filter the products by customer rating, supported devices, business size, features, and more. Also, check out GetApp’s Category Leaders report to identify the top market players for warehouse inventory management.