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How to properly calculate safety stock
How often do you lose out on sales because of inaccurate inventory data? When you run out of a product, you know how important it is to have safety stock on hand. Calculating safety stock can be tricky, but it's definitely worth taking the time to learn how to do it properly.
When deciding how much safety stock your company should carry, you must consider several factors, including the product, the seasonality of demand, lead times and supply chain disruptions that you may experience. All of these considerations play a role in calculating an appropriate amount of safety stock.
When done correctly, you can prevent stockouts, helping you capture more customer demand. In this blog post, we will discuss the basics of calculating safety stock.
What is safety stock
Before we continue, let’s make sure we’re on the same page and know what safety stock is. Safety stock is inventory you carry to protect against forecast errors and fluctuations in demand or supply. Also known as buffer stock or reserve stock, this inventory is meant to reduce the frequency of stockouts and help companies provide better customer service.
How to calculate safety stock
Let’s dive into the basics of how you calculate safety stock. It can be tricky, but it's definitely worth taking the time to learn how to do it properly.
Determine your average daily usage or demand
First, you need to determine your average daily usage or demand for the product. You can do this by looking at your past sales data and finding the average daily sales over a certain time period, such as a month.
Consider any foreseeable fluctuations in demand
Next, you need to consider any foreseeable fluctuations in demand, such as seasonality or events that could affect sales. Once you have these numbers, you can calculate your safety stock by multiplying the average daily usage by the maximum number of days it would take to restock, also known as the lead time.
For example, if your average daily usage is 100 units and it takes a maximum of three days to restock, your safety stock would be 300 units.
But not all safety stock calculations are that simple.
The two main methods of calculating safety stock
There are two main methods for calculating safety stock: the fixed formula method and the variable formula method. Let’s take a look at both methods and help you decide which is best for your business.
The fixed formula method is based on a fixed percentage of average daily sales. This method is relatively simple to use, but it can be inaccurate in cases of high or low demand.
The variable formula method takes into account past sales data, allowing for a more accurate calculation of how much safety stock you need. However, this method can be more complex to implement.
Which method is best for your business? That depends on your situation. The fixed formula method might be better if your demand is relatively stable, while the variable formula method would be more accurate if demand is highly variable. Whichever method you choose, make sure you are regularly reviewing your safety stock levels to ensure that they are still appropriate.
Calculating the unforeseeable
Calculating safety stock is not an exact science. It's important to periodically review and adjust your safety stock levels as needed.
And don't forget, having too much safety stock can also be a problem, leading to excess inventory and wasted resources. Having too little inventory can result in lost sales and unhappy customers while having too much inventory can tie up valuable resources and increase carrying costs needlessly.
Keep these things in mind as you determine an appropriate amount of safety stock for your business and make sure you are constantly reviewing and fine-tuning your calculations.
How often do you experience a stockout that could have been prevented? With PorterLogic, you can align demand and inventory to better manage lead times to prevent stockouts. Never go out of stock again with PorterLogic.
