Safety Stock-What is it & How to calculate it?

Stock keeping is one of the important things in Inventory management, that can help maintain the stocks and match the in-demand of customers and avoid losing them to competitors.

Safety Stock is one such term used in the inventory management system that eliminates those quirky stock management crises.

Let us understand more about what is safety inventory.

What is Safety Stock

Safety Stock is a logistical term used to describe the extra level of stocks that are maintained to counter the risk of stock-outs, which are a result of the uncertainties in the supply & demand chain.

Let us understand this term in more detail and try to figure out how this Safety Stock helps the company during an inconsistency in the supply& demand chain. 

Any company or organization that sells products or equipment will always face hurdles in their supply-chain modules due to the highly volatile market situations.

Not only this, sometimes there will miscalculations about the product demand, sometimes there will be problems in shipment which can cause a deficit in the supply and demand of the product.

Such deficit when occurs in the supply-chain system of a company, the company fails to satisfy the needs of their customers. Due to this, there is a possibility of losing customers to competitors who can match their requirements at the same point in time.

And once the customers are grabbed by your competitors, then you are surely going to lose that customer, as they are not coming back to you.

To avoid this, you need to keep the stocks readily available at your stores and find a strong solution to cater to such situations which can lead to losing customers.

And that is why the term Safety Stock is introduced in the inventory management systems, which helps you to maintain your inventory level as per the supply-demand of your customers.

But instead of all these things, you cannot just blindly estimate how much safety stock is needed for your company. For this, you can use safety stock formulas to calculate the exact number of stocks needed to maintain the supply chain and help you to be ready with stocks to keep the orders flowing smoothly.

Benefits of Safety Stock 

• Prevents running out of stock for your highly in-demand products
• Protects your business deliverables from sudden deficits in supply and demand 
• Offers flexibility in the process of ordering products and raw materials
• Prevents losing of customers to competitors

Formula to calculate Safety Stock –

Now, as you have learned about the safety stock and understood its importance, let us now understand how to calculate these with a formula. There are various formulas or ways to calculate the safety stock, but you need to determine the exact number of stocks required to fulfil the urgent orders received from your customers and manage the inventory efficiently.

And for this, you need to make an exact forecast with the help of your previous sales and all the statistics related to specific orders.

But before that, let us list out the terms you will need to calculate the safety stock-

Lead Time: it is the time consumed from ordering an item and getting it shipped to your warehouse or store.

Daily Usage: you need to analyze what is the daily sale of the respective product.

Service Level: here you need to calculate the percentage of profit when you are avoiding the stock out of the said product.

Average: by calculating the average of a set of data from your inventory, you can come to a conclusion where you can know the exact sales figure for a particular stock.

Standard Deviation: here it means to measure the variance of the lead time that occurred during the process.

There are two formulas through which you can calculate the Safety Stock, one is Manual Method which is simple and easy to calculate & the other is the Kings method, which is a little bit complex but accurate.

Here we will see the manual method –

The manual method is the simplest method to Calculate Safety Stock.

Formula –

(Maximum Daily Usage X Maximum Lead Time) – (Average Daily Usage X Average Lead Time)

With this formula, you can determine the exact safety stock numbers to avoid the supply-demand deficit in your inventory management system and losing your customers to competitors. 

So, as we understood what is Safety Stock and the formula to calculate it, in this article, there are numerous ways and solutions for your inventory management system available at Zap inventory, which is one of the leading inventory management software.

Visit zapinvetory.com and start your journey with Zap Inventory.