What is Safety Stock? (+ How to Calculate It)
Your business is growing, your products are flying off the shelves and your customers are happy. You place an order to replenish your stock and then you realize, you don’t have any safety stock. By the time your new stock arrives, it’ll be too late. You won’t have enough inventory to meet demand, you’ll lose sales and you might even lose customers.
Like a safety net, safety stock stops you from falling into that devastating trap but what is it, why is it important in retail and e-commerce and how do you calculate it? Keep reading to see the challenges of safety stock, some examples and how inventory optimization software can help you manage safety stock.
Table of Contents
- What is Safety Stock?
- Why is Safety Stock Important in Retail and E-commerce?
- How to Calculate Safety Stock
- Challenges of Safety Stock
- Examples of Safety Stock Calculations
- Manage and Calculate Safety Stock with Inventory Optimization Software
What is Safety Stock?
Safety stock, also known as “backup inventory” or “backup stock” is extra inventory that mitigates the risk of stockouts if there’s a sudden surge in demand or an unforeseen change in supplier lead times.
Why is Safety Stock Important in Retail and E-commerce?
There are many reasons to keep safety stock when you run retail and e-commerce businesses:
Avoid Stockouts and Lost Sales
If you experience an influx of demand and don’t have the right amount of safety stock, you could experience stockouts. Stockout costs start with lost sales but they don’t stop there. You could lose customers, get negative reviews, have disrupted cash flow and more.
💡Pro Tip: Maintain optimum stock levels and adjust to sudden changes by using Singuli to manage multiple vendors and products with different lead times.
Be Ready For Unexpected Changes in Demand
Demand forecasting isn’t easy. You have to plan for seasonality, size curves, trends and anything else that could affect your customers’ desire and ability to buy. Sometimes, changes in demand are caused by unexpected spikes, safety stock softens the blow in those situations.
💡Pro Tip: Avoid unexpected changes in demand and automatically account for seasonality in your inventory forecasts with Singuli’s Advanced Forecasting tools.
Mitigate Supply Chain Interruptions
Suppliers have challenges, just like you do in your business and supply chain interruptions happen. Keeping good relationships with a wide range of suppliers is a good idea but there will still be occasions when your lead times are delayed. Safety stock mitigates these interruptions and stands strong as a tool in your retail demand planning.
📌Get Started: Be ready for anything. Access any metric with Singuli’s query panel for customer reports so you can quickly adjust to sudden changes.
Protect Your Margins Against Price Fluctuations
If your suppliers raise prices due to a sudden scarcity in raw materials, unexpected demand in the market, government policies or any other reason, you need to be ready. If you have enough safety stock, you can avoid the cost of buying stock at higher prices without losing sales. Make sure you keep track of these fluctuations in your inventory planning.
💡Pro Tip: Plan for multiple versions of the future with Singuli’s Scenarios. Ask “what if” and get answers immediately
Keep Customers Happy
We live in a world where customers expect products to be in stock and hope for next day delivery if they’re ordering online. Next day delivery isn’t always viable but good inventory forecasting and safety stock means avoiding stockouts is. If you plan well, customers will trust you to have stock when they need it and will keep coming back.
📌Get Started: Never miss a potential sale. Use Singuli to send reorder alerts straight to your inbox so you’re always ready to meet customer demand.
Build Better Supplier Relationships
Most suppliers don’t like having to deal with urgent reorders. It causes them to rush and disrupts their operations, creating potential problems with their other customers. If you need urgent reorders too often, you’ll damage your supplier relationships. If you have enough safety stock, you can reorder at regular intervals and keep your suppliers happy.
📌Get Started: Issue and track POs, reorder on autopilot, forecast demand and optimize your inventory with Singuli.
How to Calculate Safety Stock
There’s more than one way to calculate safety stock. Let’s look at each formula and the best time to use it:
Fixed Safety Stock
Fixed safety stock doesn’t need a formula. Your inventory planner sets a safety stock quantity that never changes. If you’re looking to phase out products, like C grade products from your ABC analysis, you might set the safety stock level to zero. This method often causes inventory levels to be higher than needed and increases the chances of overstocks. If you decide to set a lower level to avoid overstocks but keep a fixed level, the risk of stockouts becomes higher.
✅When to use it: Fixed safety stock is better than having no safety stock but you would only use it if you don’t have the right inventory planning software for something better.
Basic Safety Stock Formula
Also known as the general formula, the basic safety stock formula is the simplest method. You take the number of products sold per day and multiply it by the number of days you need safety stock for. Demand, lead times and other variables aren’t considered.
$$\scriptsize\text{\footnotesize Safety stock} = \text{\footnotesize products sold per day} \times \text{\footnotesize number of days safety stock is needed}$$
✅When to use it: The basic formula leaves out a lot of variables so it’s best when you just need a ballpark figure.
Standard Deviation Safety Stock Formula
Greasley’s formula, or the standard deviation safety stock formula is more accurate than the basic safety stock formula because it considers both lead time and demand fluctuations as random. It’s not perfect as it still misses stock that’s still in production and not ready for sale.
$$\text{Safety stock} = (\textrm{Z} \times \textrm{σLT} \times \textrm{D \scriptstyle avg})$$
Let’s break down this formula:
- Z represents the number of orders a company expects to fulfill over a specified time.
- σLT is the standard deviation of the lead time. If you think that sounds complicated, it is. Thankfully, standard deviation calculators make it easier. You input your variables, in this case the lead times for each order within a given period, and the calculator gives you the standard deviation.
- D Avg is the demand quantity over a specified period. Safety stock usually considers daily demand, which is the total sales over your set period divided by the number of days.
✅When to use it: This is best for a clearer overall vision of your safety stock. Demand and lead are taken into consideration so it’s more accurate than the other formulas. If you have multiple SKUs (stock keeping units) and size curves this formula is particularly useful.
Average - Max Safety Stock Formula
With the average - max safety stock formula, you multiply the maximum lead time by the maximum daily units sold for a particular product and do the same for the average of both. To get your average safety stock level, you subtract the total averages from the total maximums.
$$\text{Safety stock} = \left(\text{\scriptsize Max daily units sold} \atop \overset{\times}{\text{\scriptsize Max lead time in days}}\right) - \left(\text{\scriptsize Average daily units sold} \atop \overset{\times}{\text{\scriptsize Average lead time in days}}\right)$$
✅When to use it: For shorter lead times as this method doesn’t consider long-lead-time variables.
Safety Stock With a Variable Lead Time
This method, known as Heizer & Render’s formula, deals with situations where the lead time changes but demand is roughly the same. The σLT represents the lead time deviation in this scenario. The Z value is the same as it was for the standard deviation formula.
$$\text{Safety stock} = \textrm{Z} \times \text{Average sales} \times \textrm{σLT}$$
✅When to use it: For products that have reliable regular demand but where lead times are variable.
Safety Stock With Variable Demand Formula
To calculate the variable demand formula, you need to find the average delay. To do this, you add together the orders that took longer than the average to arrive, then divide the sum by the number of orders that took longer than average to arrive. There are online tools that can work out the average delay and its square root for you.
$$\text{Safety stock} = \text{\footnotesize Standard deviation of the demand} \times \text{\footnotesize the square root of the average delay}$$
✅When to use it: For products that have reliable lead times but demand is variable.
Challenges of Safety Stock
You’ve already learned that there are multiple formulas that you can use to calculate safety stock. Choosing the right one for your business is a challenge but it’s not the only thing to consider:
Having Too Much or Too Little Safety Stock
If you have too much safety stock, you won’t have space to bring in new products and better selling merchandise, which in turn raises your cost of inventory. There’s a greater risk of overstocks and therefore, higher inventory holding costs.
Too little safety stock and you risk stockouts. This results in missed sales and eventually lost customers. An increase in stockouts is almost always accompanied by an increase in stockout costs.
Using the Wrong Safety Stock Formula
Choosing which safety stock formula to use is a challenge for every business. It can vary from business to business, location to location and product to product. Your business needs a safety stock formula that works directly with your data variables and your needs.
Adjusting Safety Stock Levels With Business Growth
Your safety stock levels might be perfect in the here and now but as your business grows, your safety stock needs to grow too. It’s important to review your safety stock regularly and to use software that offers accurate, regular reports.
💡Pro Tip: Take advantage of Singuli’s detailed Reporting & Analytics to create a forecast that meets the strategic needs of your business.
Eliminating Safety Stock
It’s tempting to reduce safety stock as average lead times go down. This is only wise if you’ve considered and accounted for all other safety stock variables. Adequate safety stock needs to be a priority for most products and most businesses.
Depending Too Much On Safety Stock
Safety stock adds a layer of protection against stockouts and overstocks but it should never be your whole inventory planning strategy. Retail demand planning, preparing for a new product launch and using the best inventory planning software are just a few more factors to consider.
Examples of Safety Stock Calculations
Lets see how safety stock could work for businesses working in clothing and electronics:
Clothing
Cut The Wool sells warm, winter sweaters. Their demand changes like the seasons, literally. Customers are more likely to buy from them in the autumn and the winter than the spring or summer. They also have regular fluctuations in lead times so the standard deviation safety stock formula works best.
Let’s see how this could work if Cut The Wool expects to fulfill 50 orders over a specified time period. They have a lead time deviation of 1.5 and an average daily demand of 5.
Formula: $$\text{Safety stock} = (\textrm{Z} \times \textrm{σLT} \times \textrm{D \scriptstyle avg})$$
Example calculation: $$\text{Safety stock} = 50 \times 1.5 \times 5 = 375$$
Electronics
Eddy’s Electronics sell HDMI cables. The demand is stable across the whole year but the lead time sometimes fluctuates. They have no reason to expect a surge in demand so they use Heizer and Render’s formula. This gives them enough safety stock to cope with variations in lead times.
In this situation, Eddy’s Electronics expects 40 orders over a specified time. They sell 2 cables per day on average and have a lead time deviation of 2.
Formula: $$\text{Safety stock} = \textrm{Z} \times \text{Average sales} \times \textrm{σLT}$$ Example Calculation: $$\text{Safety stock} = 40\times2\times2 = 160$$
Manage and Calculate Safety Stock with Inventory Optimization Software
Safety stock is important but it’s also challenging to know which formulas to use and how much stock to keep for each product. The right inventory optimization software can help you manage and calculate safety stock. You can use it to accurately forecast demand, to keep track of supplier lead times and to do safety stock calculations for you. The best software accepts and processes relevant data for the most accurate results.
Now you know what safety stock is, why it’s important, how to calculate it and the challenges you need to overcome. You can incorporate it into your inventory optimization software, avoid stockouts and reduce overstocks.
Forecast demand, issue and track POs, re-order on autopilot, and step up your reporting game across multiple channels and locations. Get in touch to see how Singuli can help you optimize your inventory.
Safety Stock FAQ
What is the Meaning of Safety Stock?
Safety stock is surplus product stored to prevent stockouts. It’s extra insurance against fluctuations in demand.
Are Buffer Stock and Safety Stock the Same Thing?
Most businesses use the terms buffer stock and safety stock interchangeably, but they’re not exactly the same. Buffer stock and safety stock are both excess inventory but buffer stock covers variations in demand and safety stock is held for supplier delays and other internal variations.
What Should My Safety Stock Level Be?
Several factors determine your optimal safety stock. It depends on the variation in current and future demand, lead times, inventory velocity and other relevant data. You need enough safety stock to cover your product lead times.
Forecast demand, issue and track POs, reorder on autopilot, and step up your reporting game across multiple channels and locations. Get in touch to see how Singuli can help you optimize your inventory.