Don’t let stockouts derail your business. Explore the importance of safety stock in maintaining a reliable and resilient supply chain.
What is safety stock?
Safety stock is a quantity of stock held by a business or organization as a buffer or insurance against unexpected supply chain disruptions or variations in demand. It is an additional amount of stock beyond the expected demand level, kept to ensure that there is enough inventory to meet customer needs even during unexpected events such as supplier delays, sudden spikes in demand, or production issues.
Safety stock acts as a protective measure to avoid stockouts and the associated costs and negative impact on customer satisfaction that can result from them. The amount of safety stock required will vary depending on factors such as lead time, demand variability, and the risk of supply chain disruptions.
Why is it important for inventory systems?
Safety stock is important for inventory systems for several reasons:
- Ensures customer satisfaction: helps to prevent stockouts, which can lead to dissatisfied customers and lost sales.
- Reduces lead times: businesses can reduce the lead time required to fulfill customer orders, as they don’t need to wait for new stock to arrive before fulfilling orders.
- Protects against supply chain disruptions: Safety stock acts as an insurance policy against unexpected supply chain disruptions, such as supplier delays or quality issues.
- Increases flexibility: businesses have the flexibility to respond quickly to changes in demand, without the need for expensive rush orders or expedited shipping.
- Improves inventory accuracy: By having safety stock on hand, businesses can reduce the risk of stock discrepancies and improve inventory accuracy, which can lead to cost savings and better decision-making.
The role in preventing stockouts and supply chain disruptions
Safety stock plays a critical role in preventing stockouts and supply chain disruptions by providing a buffer of extra inventory that businesses can draw upon during unexpected events. Here are a few ways in which safety stock helps to prevent stockouts and supply chain disruptions:
- Demand variability: helps to account for variability in demand, ensuring that there is enough inventory on hand to meet unexpected spikes in demand.
- Lead time variability: help to mitigate the impact of lead time variability, by providing a buffer of inventory that can be used to bridge the gap between the time a customer places an order and the time it takes for new stock to arrive.
- Supplier disruptions: acts as a buffer against supply chain disruptions, such as delays or quality issues with suppliers, by ensuring that businesses have enough inventory on hand to meet customer demand even when there are disruptions in the supply chain.
- Production issues: help to address production issues by providing businesses with a buffer of inventory that they can use to bridge the gap while production issues are resolved.
How to calculate the right amount
Calculating the right amount of safety stock for your business involves several steps, including:
- Determine your service level: Service level is the probability that you will be able to meet customer demand without stockouts. A common service level is 95%, which means that there is a 95% chance that you will have enough stock to meet customer demand. However, the appropriate service level for your business may vary depending on factors such as customer expectations and industry norms.
- Calculate your lead time: Lead time is the amount of time it takes for new inventory to arrive once an order is placed. It is important to accurately calculate lead time, as it will be used to determine how much safety stock is required.
- Determine your demand variability: Demand variability refers to the degree to which demand fluctuates over time. This can be calculated using historical sales data, by looking at the standard deviation of demand over a given period of time.
- Use safety stock formulas: Once you have determined your service level, lead time, and demand variability, you can use safety stock formulas to calculate the right amount of safety stock for your business. There are several safety stock formulas to choose from, but one common approach is to use the following formula:
Safety stock = (Service level x Square root of lead time x Standard deviation of demand)
Implementing a WMS like Tag Samurai can bring several advantages to warehouse operations, such as improved inventory accuracy, increased efficiency, better labor planning, enhanced decision-making, and reduced costs.
With its complete features and benefits, the Tag Samurai system can help organizations streamline their warehouse processes and improve customer satisfaction.
Follow TAG Samurai on LinkedIn for more interesting tips and information about supply asset management!
Try this software now! Contact our marketing team and get a free Demo!