The definition of safety stock or buffer stock in inventory management is the amount of extra inventory a business keeps on hand to protect against stockouts. Safety stock can refer to spare parts, raw materials, or finished products that are held in reserve for use at a later time. It is especially used when a part is unavailable or when demand is unpredictable. Safety stock can also be reduced when there are similar items in stock, toward which the customer service staff can direct customers.
We don’t guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services. The resulting figure should be higher than the reorder point to avoid running out of stock. When executed correctly, it should be based on an accurate demand forecast that’ll closely resembles the one from the real demand. This formula is ideal when there are significant variations in the supply from your vendors’ end.
After giving open to buy balance using this formula you can buy inventory by item priority. You don’t want to miss sales opportunities, because it took too long for the product order to be fulfilled by the vendor. Your discount has been successfully applied and will be reflected after adding items to your cart. Megaventory is a US company founded in 2010 – one of the first to offer online inventory and order management.
Cycle Stock
The value for fixed safety stock generally remains unchanged unless the production planner decides to change it. Fixed safety stock levels can even be set to zero for items that you want to phase out. However, if there is a sudden demand surge for an item with very little safety stock, you might not be able to fulfill the orders. The size of the safety stock depends on the type of inventory policy in effect. An inventory node is supplied from a “source” which fulfills orders for the considered product after a certain replenishment lead time. In a periodic inventory policy, the inventory level is checked periodically (such as once a month) and an order is placed at that time as to meet the expected demand until the next order.
- Think of the clothes stores put on mannequins or storefront window displays.
- In short, it’s important to be smart about safety stock in order to keep supply chains moving.
- This is where you can tap into an additional 30 units you hold in case of unpredictable situations like this one.
- It is thus necessary to maintain a balance so that you do not have to incur any loss.
When you hold enough safety stock, you extend your ability to keep selling your products. You’ll eventually need your supply chain to go back to business as usual, but safety stock can postpone (and often avoid) a stockout. On another one, your supplier can’t get the merchandise to you in the usual timeframe.
Anticipation Inventory vs Safety Stock
Every time you hit a cap on how much stock you have available, that represents the additional sales you weren’t able to make. Some of these costs are tangible, and force a business to spend money to mitigate damage or fix the stockout. Using the 3,675 units it kept in reserve, the business is able to keep fulfilling orders and meeting demand.
Setting safety stock to zero
In addition, safety stock is frequently wasted because it doesn’t sell until the next season or quarter. That can happen even though there was enough demand for it during the current season or quarter. In other words, having an accurate inventory and safety stock will save you money.
Safety stock calculation: 3 different methods
Safety stock is extra inventory retailers hold to prevent stockouts in case of an issue in the supply chain or an increase in demand. Heizer & Render’s formula is ideal when there are significant variations in supply on your vendor’s end. It uses the standard deviation of the lead time distribution, giving you a more accurate picture of your lead time and how frequently you deal with very late shipments.
Having too much safety stock can result in many holding costs, such as the costs of obsolescence, inventory storage, interest expense, and spoilage. This can be a major concern when inventory has a short shelf life, perhaps due to fashion trends or because it spoils within a short period of time. When this is the case, a well-run business will constantly monitor its inventory levels and sell off excess stocks within a above the line below the line financial concept 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 is excess inventory that acts as a buffer between forecasted and actual demand levels.
Safety stock is the extra inventory that a company keeps on hand to account for unexpected increases in demand or disruptions in the supply chain. Reorder point formula is the minimum inventory level (in terms of quantity or value) at which a company must replenish its stock. The reorder point is determined by the company’s lead time and safety stock.
b. Supply chain disruption:
This provides enough spare units of a product to sell in the event of rapid demand fluctuation. Even the fastest lead times are usually two weeks, and you can’t rely on that when you need products to sell right now. Safety stock should also be managed with customer expectations, as low levels can result in reduced sales. This can lead to decreased profits, increased costs from extra expediting and warehousing, and potential damage to reputation.
Other costs are intangible, and result in an opportunity cost to your business. Customers who are ready to buy but find their desired product is out of stock may not purchase anything, which is a lost sale. That customer may also go to a competitor, which can result in lost sales in the future. That’s why it’s important to approach safety stock calculations through numbers instead of emotions and fear. Rely on data from your POS, market research, conversations with suppliers, and demand forecast to make the most informed safety stock call.
Open-to-buy (OTB) is an inventory management technique to determine how many items you have to purchase. Lead time is the time it takes for a company to receive an order from the time the order is placed. For example, if a company orders inventory on Monday and the inventory arrives on Wednesday, the lead time is two days.