4 Reasons for Carrying Safety Stock Inventory
- Why do I need safety stock?
- What is safety stock?
- 1 Protect against unforeseen variation in supply
- 2 Compensate for forecast inaccuracies (only when demand exceeds the forecast
- 3 Prevent a 'fire-fighting' mentality
- 4 Avoid stock outs to keep customer service and satisfaction levels high
Why do I need safety stock?
Image these scenarios:
You’re a manufacturer working on an order when you realise that you’re out of a necessary component due to a sudden increase in demand, meaning you’ll have to wait until the parts comes in to finish the order for your customer.
Or maybe you’re a distributor who just received a regular order from a customer only to realise that your supplier is experiencing a longer lead time than usual and you won’t be able to fulfil your customer orders on time.
Sound familiar? In both of these cases, customer service levels are negatively impacted by a completely preventable challenge – if only you’d been carrying safety stock inventory!
What is safety stock?
Safety stock inventory, sometimes called buffer stock, is the level of extra stock that is maintained to mitigate risk of run-out for raw materials or finished goods due to uncertainties in supply or demand. The purpose of safety stock is to ensure that, once you’ve run through your cycle stock (what you were expecting to sell during a certain time period), you’re still prepared for any orders if there is an unexpected change in demand or in the supply.
To keep customer service levels high, accurately calculated safety stock inventory is a necessity.
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 to 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.
4 Primary Reasons for Carrying 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.
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.
But it’s important to keep in mind that, like the rest of your inventory, safety stock requires more than just a ‘one size fits all’ approach. With rule-based approaches, 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. Since each SKU in your inventory has a unique demand pattern, you need to adjust your safety stock levels accordingly.
Rule-based approaches are proven to be less effective in determining optimal inventory levels for many operations. Plus 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.
Now that you know how important safety stock is to a healthy supply chain, learn the best practices for calculating safety stock for your business with our free white paper “How to Calculate Safety Stock for Inventory Management”.