How To Calculate Safety Stock? Safety Stock Formula And Calculation


It prevents you from running out of stock, especially on particularly popular items. Read on to see why safety stock is necessary and how to get it right for your business. All your products, customers, orders and transactions synced and secure in the cloud. Cloud Fulfillment Platform Logiwa has built a fully integrated WMS and cloud order fulfillment software solution for B2C and DTC businesses. The money you save likely won’t compensate for the money you can lose from dissatisfied customers who stop frequenting your business. When it comes to calculating safety inventory, it doesn’t pay to go with your gut.

how to calculate safety stock? safety stock formula and calculation

In addition, businesses should also know their desired service level. In most B2B relationships, this is formalized in service level agreements. For B2C companies, senior management determines this number by balancing the cost of stock-outs or unfulfilled promises against the cost of losing customers.In this case, the safety stock is calculated considering the demand and supply variability risks during this period plus the replenishment lead time. In this case, safety stock is calculated considering the risk of only the replenishment lead time.Calculating safety stock plays a crucial role in preventing stockouts, which causes lost revenue and unhappy customers. If demand for your product fluctuates but your lead time is relatively predictable, this can be a helpful method. As a business owner, one of your biggest nightmares is missing out on sales because of stockouts.

Limits Of The Normal Distribution For Your Safety Stock :

Positive numbers are the number of days over the expected time and negative numbers mean that the delivery arrived earlier than the expected time. With this information, we can find the standard deviation in lead time. The simplest method for calculating safety stock only requires a four-step process to calculate these variables.

  • The definition of standard deviation is a quantity calculated to indicate the extent of deviation for a group as a whole.
  • Lead time is the delay between the time the reorder point (inventory level which initiates an order) is reached and renewed availability.
  • To calculate the standard deviation, you need your expected lead time and the actual time the shipments took.
  • These are the terms you’ll need to know to calculate safety stock.
  • Safety stock is inventory that a business holds to mitigate the risk of shortages or stockouts.
  • Too little safety stock can result in lost sales and, in the thus a higher rate of customer turnover.

At this point, you haven’t been in operation long enough to accurately calculate supply and demand. Overestimating how much you’ll need could cripple your finances. This formula is a little more complicated, but it’s very useful. The main issue is that only established businesses will have the statistics necessary to get accurate results. This formula also assumes that lead time varies, but demand doesn’t, which isn’t always true. The majority of products have a service level of 85%-90%, with crucial goods going to 95% and more. But it’s hard to measure how well items are going to sell, and impossible to predict when things won’t get shipped on time.

Inventory Management Software For Your Growing Business

It’s hard to predict buying behavior, so sales trends and buying habits may not sit perfectly within the mathematical bounds of these formulas. While safety stock will help you to prevent stockouts, they will still occur. This method is most effective for scenarios where there is a high degree of uncertainty about both demand and lead time. Using the example of razor blades from earlier, the lead time does not impact the demand of the razor blades. We have explained how to calculate the other figures in the previous methods. Now that you have the figures, simply put them into the average-max formula and you will have your safety stock calculation. This method is commonly used but can be difficult if you have a particularly long lead time.

How much safety stock should be built into the forecast?

Many manufacturers have a lead time of 60 days, and most would consider 30 days of safety stock an ideal level of inventory. Given these two inputs, a minimum of 70% forecast accuracy is needed to ensure the business doesn’t run out of inventory.There are pros and cons of selecting a statistical-based safety stock. Although the statistical method is based on accurate mathematics, predicting business is not always as accurate. The statistical method to calculate safety stock is based on the premise that is possible to mathematically calculate the level of safety stock to prevent a stock-out situation. Remember, no inventory analysis is perfect, and the real world is more complex than an equation. That said, incorporating the safety stock formula can give you a leg up on your competition when demand spikes and provide a much-needed insurance policy against stockouts.

Buffer Inventory Meaning: Define Buffer Inventory

As in this case, variability can impact sales and vice versa, even more, safety stock is needed. If you consider that the request and the lead time are dependent, i. That the lead time causes uncertainty on the request and vice versa, you have the following formula which will sum the safety stock of Formula 1 and Formula 2, giving 377 quantities in our example. Safety stock is one of the easiest ways to avoid running out of stock and not fulfilling orders. Without it, businesses would lose sales and, ultimately, customers. Safety stock is a valuable tool to combat stockouts, but it can have some disadvantages.It’s important to remember that the sales don’t only have to cover the sold products’ own carrying costs, but the carrying costs of the safety stock as well. The optimal level depends on several factors, including inventory velocity, current and future demand, sales volume and supplier lead times. As a rule of thumb, the safety stock amount should be the amount of inventory used per day multiplied by the lead time in days. Should extreme cases have an impact on stock and sales, there’s a risk that decision makers may not trust the safety stock formulas at all and strive for high service levels. As we have seen, a service level of 100% would mean having infinite stock and is not a financially viable or safe option.

how to calculate safety stock? safety stock formula and calculation

Not only does this cut into potential revenue, but it can also sever ties with loyal customers you’ve worked hard to build relationships with. That person is now either going to buy from a competitor or not buy at all. It’s not a replacement for regular inventory; it’s simply a backup. It gives you peace of mind and operational flexibility when production halts, accidents happen, or customers buy more out of nowhere.If you have deliveries arriving earlier or later than expected, a safety stock formula will help you to cover unexpected delays and demand fluctuation to maintain a consistent output. The “out of stock” situation is beneficial to companies when the company has no demand for certain items, and zero inventory means no warehouse costs. Cycle stock is the amount of inventory that is planned to be sold for a certain period. This could mean the time period between orders or how long a production cycle takes.

Time Period Based

It also affects you inventory carrying cost, so it’s important to control. The problem often is that we will put a safety threshold of 1000 quantities, for example, and sales will change but not the safety stock. It is, therefore, necessary to have dynamic formulas that evolve. The most important thing already will be the quality of the data, which is even more important than the method chosen in terms of sales and lead times.

how to calculate safety stock? safety stock formula and calculation

This is important even for businesses who participate in a consignment inventory model or other non-traditional partnerships. This is basically all there is to know about how to calculate safety stock. Your stock holding formula will help your business navigate safely through all the fluctuations in demand and lead time. We come to put this famous safety stock to come and “hide” our problems. As another example, a bicycle manufacturer was recently featured in a popular biking magazine and experienced a sharp uptick in orders. As the manufacturer fulfills orders, inventory is depleted faster than the average lead time, increasing the risk of a complete stockout.

How Can Safety Stock Improve Inventory Management?

A study at Harvard found that over 40% of shoppers go to another store when a product is out of stock instead of looking for a substitution. Call it impatience or savviness, but stockouts are every business’s problem. This safety stock is more important because it takes into account both uncertainty about lead time and sales.In addition, some business methods employed by companies to improve efficiencies in the supply chain may work against the mathematical equations used in calculating safety stock. Whereas the cost of a production stoppage can be calculated when a production line stops and has to be retooled for a new order when the stock-out of a component occurs. There are three techniques that are used to calculate safety stocks; statistical based, fixed quantity, and time period based. These customers are so sales-ready, they’re literally trying to give you their money.To find this, we use an Excel formula called NORM.S.INV with the service rate as the only variable. Quickly, the normal distribution is a mathematical law that will make it possible to predict the probability of selling a certain quantity. Safety stock doesn’t grow with the business, meaning the number of units currently earmarked as safety stock may not be enough as the business expands. Inventory managers should review bottlenecks and safety stock numbers regularly and adjust the amount as necessary. If your current surplus level is zero, don’t jump up to 5000 extra units.Finding the right balance between cost and service level is key. A 100% service level would mean you always have stock, which is a risk in itself and varies in demand. The amount of safety stock that an organization chooses to keep on hand can dramatically affect its business. Too much safety stock can result in high holding costs of inventory.Storage costs can cut into your ability to hit your inventory KPI. If you get the following question right, you’ll have a much better grasp on the ways to perform inventory reduction. In 1950, a guy invented something called the Magic 8-Ball, but it didn’t work. Try to stabilize demand if you can by limiting the number of promotions or limiting the number of new products, for example. Brainyard delivers data-driven insights and expert advice to help businesses discover, interpret and act on emerging opportunities and trends. There’s also a chance they’ll never return to your store, period. That one purchase might be all your competitor needs to convert them into a loyal, long-term customer.Make gradual adjustments as you gather more data, and use the number you get as a guideline, not a rule. Add the total variances and divide the result by how many shipments you measured. Then, add this to your expected time, and you have your standard deviation. If you’re looking for a quick & easy answer, first try our safety stock calculator. Then check out the below option for manual calculation as well as the “King” formula. Overall, its most substantial impact is on customer satisfaction. A customer who leaves your website because you’re out of their preferred item will likely never come back for it.When this is the case, a well-run business will constantly monitor its inventory levels and sell off excess stocks within a short period of time. However, doing so can annoy customers if the result is stockout conditions when customers want to make a purchase. In short, it can be quite difficult to optimize the precise level of safety stock at which a company’s customers are least unhappy, while also minimizing the investment in inventory. Safety stock can also be reduced when there are similar items in stock, toward which the customer service staff can direct customers.