Safety stock is a term commonly used in the field of supply chain management and inventory management. It is a type of buffer inventory kept to protect against unexpected surges in demand, stockouts, or supply failures. Safety stock ensures that customers’ demand can be met even when actual demand exceeds the planned demand.
The amount of safety stock held can vary depending on the needs of the business and their inventory management strategy. Generally, businesses will want to maintain a balance between avoiding stock-outs due to fluctuations in demand and carrying too much inventory, as this can result in high carrying costs.
The first step in estimating the necessary amount of safety stock is to analyze historical sales data. This can help determine the likelihood of unexpected surges in demand and allows businesses to plan accordingly. When looking at historical sales data, factors such as seasonality, supplier accuracy, and lead time should all be taken into consideration.
Once the historical data has been studied, the next step is to determine the supply chain strategy. This could include the use of a service level, which is a measure of the amount of customer service a company provides based on the amount of stock they carry. This is usually calculated as the percentage of customer orders filled on time. Knowing the service level desired is important when estimating the amount of safety stock due to the fact it directly impacts the amount of inventory required.
In addition, businesses need to consider the lead time associated with the supplies before making a decision about the amount of safety stock to keep. Lead time pertains to the amount of time it takes for the goods to be delivered after an order is placed. This should be taken into account when making ordering decisions as it will affect how much inventory is needed.
Once these factors have been taken into consideration, the inventory manager can begin to make a decision as to how much safety stock is required. This decision should be based on past experience and the desired service level, as well as any other factors that may have an impact on inventory levels.
Although safety stock can be beneficial in avoiding stock-outs and helping to maintain customer service levels, it can also result in carrying costs. Therefore, it is important to weigh the benefits and costs of keeping an appropriate amount of safety stock and decide on an inventory strategy that works best for the business.
