What is safety stock?
Safety stock is when a business holds products in reserve to safeguard against any unforeseen shortages or product demands. It allows you to overcome any variables in your supply chain, and increase your customer service level. With a good buffer system in place you can consistently have your product available when and where you need it.
There are a number of factors that can influence available stock levels, such as inaccurate forecasting, manufacturing shortages and transportation delays. Your ability to accurately predict sales is vital, and has the biggest impact on just how much excess stock will be available at any given time. It is impossible to forecast orders with 100% accuracy, so it is essential to hold some stock as a safeguard to provide a buffer between what you have calculated and what the market sends your way.
For businesses with dynamic product sales, safety stock is maintained as a cushion against any unexpected changes in demand. It also guards the business in case a supplier fails to deliver on time, or delivers a substandard product. Additionally, some businesses take advantage of quantity discounts when stocking their inventory, saving on costs by buying product components in bulk. Sometimes it makes sense to order large amounts of a product in advance of a future price rise.
While having a large amount of safety stock will increase customer service levels, it pays to remember that safety stock is not free. The costs associated with excess stock include storage, maintenance, security, and insurance – not to mention the overall loss of liquidity, and the opportunity cost of the capital that is now tied up in inventory. This makes having the right level of safety stock an important issue – ideally you want to have as little stock on hand as possible, without impeding any sales. The more inventory you carry, the greater your overhead costs.
How are safety stock levels determined?
While many businesses use trial and error and guesswork to determine their safety stock levels, these methods are often not successful. If you want to effectively lower your inventory and increase your customer service level, then you need to calculate a safety stock model. The perfect level of safety stock varies for each business, and comes down to how accurate your forecasting is, and how well you know your product market. To this end, Unleashed integrates with Lokad for inventory forecasting purposes. In calculating your optimal safety stock levels you have to determine if it’s best to look at it in terms of quantity or time.
While smaller organisations can afford to think of safety stock as a unit of quantity, more advanced supply chains tend to plan their safety stock in terms of time. One benefit to this approach is that it allows you to anticipate any seasonal changes in product demand.
Specialised inventory software gives a business the ability to calculate and track your safety stock as a unit of time, giving you future insight into expected sales. This allows you to accurately determine the optimal level of safety stock your business needs, even as demand changes throughout the year.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.