4 Reasons for Carrying Safety Stock Inventory
- 4 Primary Reasons for Carrying Safety Stock
Safety stock inventory, sometimes called buffer stock, is a term used by inventory managers to describe a level of extra stock that is maintained to mitigate risk of stockouts or (shortfall in raw material or finished goods) due to uncertainties in supply and demand. Many companies look at their own demand fluctuations and assume that there is not enough consistency to predict future variability.
They then fall back on trial and error or rule-based approaches such as to hold a certain number of weeks of historical average demand – for example, 4 weeks of cycle stock and 2 weeks of safety stock.
Unfortunately, rules-based approaches tend to be a ‘one size fits’ all approach to inventory management. This means, by definition, that the rule will deliver the right amount of inventory for some items, too much inventory for other items and too little inventory to meet service levels for other items.
4 Primary Reasons for Carrying Safety Stock
As a result, managers get inventory imbalances that result in excessive inventory costs, impeded cash flow and poor and/or inconsistent service levels all at the same time. In addition, rules-based approaches are only sensitive to changes in demand.
What’s the problem, you might ask? Well, this means the safety stock inventory determinations are relatively static and not linked to other important factors, such as service level, forecast accuracy and lead time variability.
Rule-based approaches are proven to be less than effective in determining optimal inventory levels for many operations. A sound, mathematical approach to safety stock calculations will not only justify the required inventory levels to business leaders, but also balance the conflicting goals of maximizing customer service and minimizing inventory cost.
1. Safety stock protects against unforeseen variation in supply and/or demand
2. To compensate forecast inaccuracies (only in case demand is bigger than the forecast)
3. Its purpose is to prevent disruptions in manufacturing or deliveries
4. Avoid stock outs to keep customer service and satisfaction levels high
Now that you know how important safety stock is to a healthy warehouse, learn the best practices for calculating safety stock for your business with our free white paper “How to Calculate Safety Stock for Inventory Management”.