How Safety Stock Can Help You Manage Your Inventory Better
This article originally appeared in Supply Chain 247 on June 4, 2019
In this paper, we see how calculating Safety Stock can help you manage your inventory better, and learn what Safety Stock is, how to calculate it, and why it is important. By SkuVault – Dominique Robinson
What is Safety Stock
Safety stock is simply defined as extra inventory beyond expected demand.
Entrepreneurs and Operations Managers carry safety stock to prevent stockouts, caused by changes in customer demand, incorrect forecast, and variability in lead times for raw materials.
Quantifying these variables makes it possible to accurately predict the amount of extra inventory to keep on hand in the event that you sell out of a product.
Safety stock is calculated by a combination of mathematical formulas designed to quantify the different variables involved when managing inventory.
When dealing with uncertainties and multiple variables, the best way to calculate safety stock is to use standard deviation for determining variations.
Variables that need to be calculated can vary depending on the product and how distribution and order placement.
While there are multiple ways of calculating safety stock the most widely accepted formula is as follows;
Safety Stock = Service Factor (Z) × Standard Deviation of Lead Time Demand
Why Safety Stock is Important
Minimizing inventory while meeting the variability of customer demand is what makes safety stock so valuable.
Preventing stockouts, overstocks, and wasted inventory space have a significant impact on profits.
Over time, stockouts result in loss of revenue, gross profit, customers, and market share. If you can not meet the demand of your customers they will find someone else who will. Taking the time to calculate safety stock not only saves you from these costs but also increases the efficiency of your storage space. The result: increased revenue and higher service level.
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