Safety Stock
Safety stock is an inventory management concept that includes a predetermined level of stock that a business holds to mitigate against risk and unexpected inventory demand. Safety stock is usually kept in-hand to cover uncertainty from factors such as production problems, supplier lead times, and customer demand volatility. It helps businesses to prevent stockouts and maintain a high level of customer service.
Safety stock stocks are used to protect against the volatilities experienced in order demand and lead time from production or suppliers. By keeping safety stock in-house, a business can be assured that it has enough inventory on hand to handle any unexpected spikes in order demand or production delays. This reduces the risk of stockouts and improves customer service levels.
Safety stock is also important for businesses that have predictible order patterns. By maintaining a certain level of safety stock, businesses can take advantage of economies of scale as demand changes. This allows businesses to order larger amounts of stock when demand is high and order smaller amounts of stock when demand is low.
Maintaining safety stock also helps businesses to reduce the cost of processing returns, credit requests, and other order management costs associated with stockouts or back orders. Furthermore, safety stock ensures that a business has enough stock on hand to meet demand if production falls short or suppliers experience a delay.
The cost of keeping safety stock in-house must be weighed against the potential savings of not stock-out interruptions. Ideally, businesses should strive to keep just enough inventory on hand to meet whatever demand spike may arise. Generally, an inventory management software can help businesses to accurately calculate the required safety stock levels based on past order demand and lead times.
In conclusion, safety stock is an important concept for businesses that need to manage their inventory efficiently and avoid stockouts. By keeping just enough inventory on hand to mitigate any risks from production problems and supplier lead times, businesses can reduce stockout interruptions, improve customer service levels, and reduce order processing costs.
