4 Reasons for Carrying Safety Stock Inventory
- What is safety stock?
- The purpose of safety stock
- How to calculate safety stock
- Reasons for carrying inventory safety stock
What is safety stock?
Safety stock, sometimes called buffer stock, is important at all stages of the supply chain. Safety stock is the extra level of stock (raw materials or finished goods) that businesses carry to mitigate the risk of run out, due to uncertainties in supply or demand. For example, manufacturers may carry safety stock of important components, to ensure they can cope with sudden increases in demand and prevent a halt in production. Whilst distributors can use safety stock to mitigate the risk of longer supplier lead times causing stockouts.
In both cases, safety stock is used to prevent service levels being negatively impacted by supply and demand variables.
The purpose of safety stock
The purpose of safety stock is to ensure that once you’ve used up your cycle stock (stock you were expecting to sell during a certain time period), you still have some contingency in place for any unexpected changes in demand or in supply. Accurately calculated safety stock is important to keep customer service levels (stock availability) high.
How to calculate safety stock
Calculating safety stock is not as difficult as you may think! Many companies use a rules-based approach to calculate both cycle stock and safety stock inventory, such as holding 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 – but not all items in inventory are the same! By definition, the ‘one size fits all’ 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. 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 – they completely ignore supply variability. Click below to download our free white paper “How to Calculate Safety Stock for Inventory Management”:
Reasons for carrying inventory safety stock
Safety stock inventory is more than just a ‘nice thing to have’. It’s a necessity. These are the top four reasons why even small and mid-sized businesses should carry safety stock inventory:
- Protecting against unforeseen supply variations
- Compensating for forecast inaccuracies
- Preventing a fire-fighting mentality
- Avoiding stock-outs
1. Protect against unforeseen variation in supply
For example, if your supplier is unexpectedly closed for a week or if there is a disruption of your order in transit, you can fulfil your customer orders with safety stock. Supply chains are longer and more globalized, with more forces causing disruptions than ever before.
2. Compensate for forecast inaccuracies (only when demand exceeds the forecast)
Perhaps you have a consistent demand for a certain item but one month you sell more than you forecasted, with safety stock inventory in place, you don’t sacrifice your customer service level while you replenish.
3. Prevent a ‘fire-fighting’ mentality
The purpose of safety stock is to ensure your supply chain runs smoothly. With safety stock in place, your workers are not running around trying to constantly locate and reorder parts – they’re fulfilling orders to your customers. With a reduced number of costly backorders you’ll see benefits to your bottom line.
4. Avoid stock-outs to keep customer service and satisfaction levels high
The real goal of safety stock? Keeping customers happy. While safety stock also helps to keep your warehouse and supply chain running smoothly, the end goal is to make sure that your customers will be satisfied and keep coming back.
In summary, it’s important to keep in mind that, like the rest of your inventory, calculating safety stock requires more than just a ‘one size fits all’ approach. With rules-based approaches, the safety stock inventory recommendations are relatively static and not linked to other important factors, such as service level, forecast accuracy and lead time variability. Since each SKU in your inventory has a unique demand pattern, you also need to adjust your safety stock levels accordingly.
Rules-based approaches are proven to be ineffective at determining optimal inventory levels for many operations. Instead, a sound, statistical approach to safety stock calculations will not only justify the required inventory levels to business leaders, but also balance the conflicting goals of maximising customer service and minimising inventory cost.
To understand more about how EazyStock inventory optimisation software can help censure you have accurate safety stock levels, contact us today on 0121 312 2992 or request a demo: