The Importance of Safety Stock In Inventory Management

Allison Champion
4 min read
December 23, 2021
Modified: October 24, 2022

Three words retailers and their customers never want to see: out of stock. To prevent running out of inventory and consequently having customers shop elsewhere for their goods, it’s important to have safety stock in place.

Safety stock is the term for an extra inventory count of product(s) stored in the warehouse. It provides a backup in case sales fluctuate without notice and there’s not enough supply to meet customer demand. The amount of safety stock necessary depends on the type of product and demand. Not all items require the same inventory level. 

If you calculate enough safety stock or buffer stock for your products, you won’t have to rely on suppliers meeting a quick turnaround time, or risk losing customers because of a lack of inventory. 

Like network optimization and accurate inventory planning, calculating your business’ safety stock formula is helpful in managing uncertainty in supply chain safety inventory. The formula involves first multiplying maximum daily sales by maximum lead time and then subtracting lead time demand.

In today’s market, where convenience and immediacy are two crucial purchasing factors, not having inventory when a customer is ready to buy can greatly affect sales and, ultimately, be detrimental to your business. There are several situations where safety stock or buffer stock comes in handy. These include:

  • Spikes in demand
  • Inaccurate forecasting
  • Avoiding stockouts
  • Protection against supply chain disruptions

Spike in Demand

There are certain times of the year when retailers can expect an influx of sales, the holiday season being the most prominent. Then, there are times when the market is unpredictable and demand for certain goods spikes without notice, and/or the cost of manufacturing the goods increases. 

This may be the result of resource or supplier scarcity or increasing competition, in addition to a number of other unforeseen circumstances. The importance of safety stock in inventory management is to prepare for these events without losing profits or experiencing issues with pipeline inventory or last mile logistics delays.

Inaccurate Forecasting

Although there are ways to manage demand variability, inaccurate inventory forecasting can leave you without the supplies required to meet customer demand. Safety stock serves as a cushion, particularly for popular items that sell out fast. Rather than set a certain amount across the board, knowing how to calculate safety stock level per item or SKU allows you to better manage an accurate inventory level based on the current and predicted demand.

Avoiding Stockouts

Even with data-driven inventory forecasting, there are unforeseen delays that can still result in a stockout. Changes in and challenges with suppliers can leave you high and dry for longer than anticipated, leaving you with no extra stock to support customer demand. This can be due to many reasons, including weather delays and worker shortages, two of the biggest factors affecting supply chains today. Safety stock allows you to maintain order fulfillment while you wait for the supply chain to return to a better state of normalcy and a regular schedule.

Supply Chain Disruptions

In addition to weather events and labor shortages, currently, there are supply chain disruptions caused by the backup of suppliers post-pandemic. Shipments are taking longer to be distributed to warehouses for delivery to customers. Additionally, since everyone is clamoring for the same space, it causes bottlenecks, which is frustrating to both customers and retailers. Getting ahead of these kinds of problems by determining the safety stock level for items should be part of any inventory strategy. 

It provides a competitive advantage when a business has in-demand items still in stock when others have run out. Customers remember experiences, good and bad, which affects their future purchasing decisions. There are certain products customers have a strong sense of brand loyalty to, but in general, the majority of shoppers want to see the items they want in stock, delivered on time, and in quality condition.

It’s smart to revisit your safety stock formula often as it serves a crucial role of safety inventory and can help you determine how to overcome supply chain disruptions in the future. In addition to the common situations when safety stock is most valuable, you’ll also want to track changes in your audience base as well as your company grows. The amount of stock you’ll need is influenced by all of these factors. 

The more you can get ahead of the game and have some breathing room when sales get hectic, the better position you put yourself in for the long term. Safety stock calculation is part of an efficient inventory management strategy that could impact your company for years to come. In order to be profitable, it must be consistently accurate.

To learn more about how to increase inventory forecast accuracy, along with other successful inventory optimization strategies to help your company grow, partner with a logistics company like Flowspace for customized solutions. Get in touch today.

 Sources

  1. Zoho. https://www.zoho.com/inventory/guides/what-is-safety-stock.html

 

Written By:

flowspace author Allison Champion

Allison Champion

Allison Champion leads marketing communication at Flowspace, where she works to develop content that addresses the unique challenges facing modern brands in omnichannel eCommerce. She has more than a decade of experience in content development and marketing.