By learning the safety stock calculation and keeping enough stock, supply chain runs well even though there are inventory delays and temporary shutdowns which shows the importance of calculating the safety stock.
Still, there are some rules that operational planners should know in order to optimize secure storage in a certain way in order to support their business objectives. Therefore, how can you do correct safety stock calculations for a better e-commerce store and price management ?
What is a Safety stock?
A safety stock is the inventory level that limits inventory shortages by having sufficient units on hand in order to avoid unexpected events that can lead to a disproportion in the warehouse’s ability to meet clients demand.
How to do the safety stock calculation?
Safety stock does more than just make some additional units available. The formula below guides the inventory managers to determine the right amount of safety stock they need and calculate some important variables.
Safety stock = (maximum daily usage x maximum lead time) – (average daily usage x average lead time)
The variables contained in this formula are:
- Average daily usage: Average number of units sold per day
- Average lead time: Average time it takes a supplier to deliver inventory
- Maximum daily usage: Maximum number of units sold per day.
- Maximum lead time: The longest time it takes a supplier to deliver inventory
Why is safety stock calculation important?
– Offset Demand Uncertainty: Fluctuations in demand are among the primary reasons to maintain safety stock.
– Minimize the Effects of Supply Disruptions: Actually unexpected disruptions on the supplier side, like raw material shortages, production issues ect can have a huge impact on your inventory.
– Reduce Administrative and Staff Hours: Safety stock also cuts down on time spent on paperwork, warehouse duties etc…
– Ensure Customer Satisfaction: Safety stock is one of the best ways to sustain customer satisfaction and loyalty.
– Maintain Market Share: Being unable to meet demand and losing customers often also means losing market share.
Tips to optimize your safety stocks:
- Focus on the quality of the forecasts by improving forecasts rather than increasing the safety stocks.
- Stabilize demand by limiting the number of promotions and new products.
- Reduce your lead times to be able to reduce your safety stock and therefore reduce your total inventory.
- Check your safety stock regularly.