Safety stock is an essential component of any successful inventory management plan. Without it, you run the risk of losing a new customer to a competitor or disappointing a current customer by not being able to fulfill their order. Some customers are unwilling to wait out a backordered item and may take their business elsewhere for good.
Sometimes, you simply can’t avoid running out of stock. Factors such as weather, your suppliers and an unexpected rise in demand can put your inventory management skills to the test.
You can avoid such situations by determining how much safety stock you need to set aside to avoid running out of stock. If you’re unsure of how to determine how much safety stock you need, we’ll outline that in this post.
What is Safety Stock?
Think of safety stock as emergency stock. Safety stock is the reserve stock you tap into when you run out of stock of a particular item. Imagine you unexpectedly depleted your stock due to stellar sales and the order you placed with your supplier is delayed by weeks or months due to the item’s popularity.
In this case, if you had set aside safety stock, you may have enough to get you by until your order arrives. Think of safety stock as insurance for your best selling items or margin winners.
But there is a fine line in maintaining too much or too little safety stock when you need to get out of a sticky inventory situation. So, let’s outline how to calculate your safety stock so you are better prepared for spikes in demand.
How Do I Calculate Safety Stock?
First and foremost, your inventory management software should help you run the reports you need to calculate your safety stock.
Your software should help you track inventory consumption in real time, making it easy and simple to extract the data you need to calculate safety stock. Without inventory management software, it will be much more difficult to quickly gather the data you need.
Maximum Daily Usage x Maximum Lead Time in Days - Average Daily Usage x Average Lead Time in Days = Safety Stock
Simple enough, right? It is, but you’ll need to calculate your safety stock every few months, especially for seasonal items. During a seasonal rush, for example, your average daily usage may go up. So, during peak season it may be wise to take a look at that number to determine if your safety stock needs to increase.
By keeping products in stock, no matter the demand or season, you’ll be able to retain your best customers and gain new ones. If you can reliably deliver on time, every time, you’ll find your customer base and revenue growing with time.
If you’d like to learn how Systum’s inventory management software can help you calculate your safety stock, fill out the form below.
Categories: Inventory Management