Safety Stock: Simplified Definition
Safety Stock is a reserve of stock in the warehouse, in case there is a higher demand for the product. Safety Stock prevents an out-of-stock situation, in the event the market responses for a product fluctuates.
This also helps you be independent of suppliers who may or may not be able to provide you with emergency stock, in case of demand. A safety stock can cover your requirements until the next order, letting you deliver quickly and not turning customers away.
Safety Stock: Technical Definition
Safety stock is the level of stock advised by logisticians to ensure that there is always an excess of certain products on the enterprise’s inventory to address a sudden demand for those products, without having to expressly depend on the supplier to provide those products last minute, mitigating a stockout situation, and helping save on time and financial resources, while also building on good customer response and therefore a returning customer base.
What is a safety stock example?
An example on safety stock can be made from how you calculate the numbers of your product with how much it sells on an average.
For example, if you would like to keep a safety stock for 15 days at the warehouse, and the product sells at an average of 100 per day, you would keep 1500 pieces (15x100) of the products at the warehouse.
How do you calculate safety stock?
Calculating safety stock may seem intimidating at first, however a simple formula can help understand this calculation better, helping you manage resources as efficiently as possible.
For calculating safety stock simply multiply the average daily sell of the product and the average time it would usually take to reach the customer (also known as ‘lead time’). Now subtract the maximum time it would take for a product’s sale on a daily basis, multiplied with the maximum lead time it would take.
|
Average Daily Use (A) |
Average Daily Use (B) |
Average Daily Use (C) |
Average Daily Use (D) |
| 15 | 5 | 20 | 10 |
So the formula would then be:
(YxZ) - (AxB)
The Safety Stock amount would be:
(20x10) - (15 x 5)
= (200) - (75)
= 125
Is safety stock good or bad?
Safety stock always comes handy based on how market demands fluctuate. They also help you build on customer loyalty and reduce your dependence on suppliers. However, it is important to make sure that you have safety stock that doesn’t eat up on your resources.
Your safety stock for products should be decided based on how much average unexpected demand can be expected, their storage costs, their shipping and management costs, etc. If done in excess without a filtering of products and regular management of inventory, safety stock can lead to a waste of your financial and time resources.
How to determine safety stock level?
A safety stock level can be determined based on the maximum daily sell of a product (Y), multiplied with the maximum lead time (Z), subtracted by average daily sell of a product (A), multiplied with the average lead time (B). So the formula to determine the ideal safety stock level for a product would be:
(YxZ) - (AxB) = Safety Stock Level
What is the purpose of safety stock?
Safety stock helps as a cushion when there is a sudden demand for a product and it takes time for the product to reach your warehouse, before dispatch. This helps quickly build a loyal customer base by responding quickly to their demands and saving you on both cost and time.
What is a safety stock level?
Safety stock levels are a level of excess stock that helps your eCommerce business address the changes in market demands so you can supply to them accordingly. These levels are based on the average demand and time taken to deliver for a particular product, and helps preemptively address a stockout situation.
What is the difference between safety stock and buffer stock?
A buffer stock helps a customer stay protected from you, the eCommerce business, in case you are unable to provide them with a product, due to sudden demand.
A safety stock on the other hand keeps you, the eCommerce business, protected from the supplier, so that you are able to quickly supply to your customer in case the need arises.
The difference between a buffer stock and safety stock, therefore, is used based on whether the customer is stocking up a product from the producer (you), or you are stocking up from the supplier.