why is safety stock important

To further understand the importance of safety stock, here are the main reasons why you need it:

• Protects you from unexpected changes in supplies. ...
• Serves as your back up when demands for your product exceeds your forecast. ...
• Keeps everything on your business to run smoothly and as usual. ...
• It helps you keep customer service and satisfaction level high. ...

Full Answer

Why should your business maintain safety stock?

Running stocks too low can, therefore, cost you customers as well as money, so it's necessary to keep extra inventory—i.e., safety stock—to manage customer demand efficiently. In this article, we'll discuss why your business should maintain safety stock.

What is safety stock in inventory management?

But first, let's understand the basics of safety stock in inventory management. What is safety stock? Safety stock is the extra product inventory companies keep on hand to reduce the chances of stockouts. It acts as buffer inventory in case demand becomes higher than expected or your supplier fails to deliver items on time.

What happens to the value of fixed safety stock?

The value for fixed safety stock generally remains unchanged unless the production planner decides to change it. Fixed safety stock levels can even be set to zero for items that you want to phase out. However, if there is a sudden demand surge for an item with very little safety stock, you might not be able to fulfill the orders.

What is the difference between cycle stock and safety stock?

Stock inventory usually consists of cycle stocks, or the inventory that is expected to be sold within a given period, and safety stock. Safety stock acts as a buffer amount that accounts for uncertainties such as:

What are the benefits of having safety stock?

4 reasons for carrying safety stock inventoryProtect against unforeseen variation in supply.Compensate for forecast inaccuracies (only when demand exceeds the forecast)Prevent disruptions in manufacturing or deliveries.Avoid stock outs to keep customer service and satisfaction levels high.

Why safety stocks are needed in supply chains?

Safety inventory is carried to satisfy demand subject to unpredictable demand fluctuations and to reduce product shortages. This type of inventory cushion is also called safety stock or buffer inventory. Safety stock can help the supply chain manager improve product availability in the presence of uncertainty.

What is safety stock why it is needed explain with the help of suitable example?

Examples of Safety Stock Suppose a company has a team to research the market demand, and it has estimated that the demand for an umbrella is nearly one thousand units every month. As a precaution, the company can decide to have one hundred units as safety stock because the demand is never constant.

What is safety stock in supply chain?

According to the APICS Dictionary, safety stock is inventory that is carried to protect against forecast errors, as well as fluctuations in demand or supply.

How do you maintain safety stock?

To calculate safety stock, work out your average daily use for a product and multiply it by its average lead time – how long it takes, in days, to arrive once you place an order. Then subtract this number from your maximum daily use times your maximum lead time. The result is the safety stock number for that product.

What is a good safety stock?

The higher the desired service level, the more safety stock is required. The retail industry aims to maintain a typical service level of between 90% and 95%, although this does depend on the product being sold. As mentioned before, a higher service level is a risk as it increases the amount of stock being held.

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.

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.

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.

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.

Why is forecast accuracy important?

Of all the factors that can impact available stock levels, forecast accuracy is the most decisive factor in predicting if you'll be able to satisfy demand.

Is managing a supply chain easy?

Managing a supply chain is not easy, although the job description is seemingly straightforward: Ensure that the right products are available at the right location at the right time. Sounds easy, right?

Why do we need safety stock?

The purpose of safety stock is to make sure your customer service levels stay high – and 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.

Why do businesses need safety stock?

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.

What is buffer 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 ...

Is rule based inventory management effective?

Rule-based approaches are proven to be less effective in determining optimal inventory levels for many operations. Plus 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 ...

Can you sacrifice customer service level while replenishing stock?

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.

Is safety stock a one size fits all approach?

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.

Why is safety stock important?

Importance of safety stock. Safety stock helps eliminate the hassle of running out of stock. If you hold sufficient safety stock, you needn’t rely on your suppliers to deliver quickly or turn away customers because of depleted inventory levels. Safety stock covers you until your next batch of ordered stock arrives.

What is fixed stock?

Fixed safety stock is a method used by production planners. They determine the amount of safety stock to keep from the maximum daily usage for over a period of time, but without using a particular formula. The value for fixed safety stock generally remains unchanged unless the production planner decides to change it. Fixed safety stock levels can even be set to zero for items that you want to phase out. However, if there is a sudden demand surge for an item with very little safety stock, you might not be able to fulfill the orders.

Can you set safety stock to zero?

Fixed safety stock levels can even be set to zero for items that you want to phase out. However, if there is a sudden demand surge for an item with very little safety stock, you might not be able to fulfill the orders.

Does Greasley take stock into account?

Greasley’s formula takes both lead time and demand fluctuations into account, which provides a more accurate way of calculating safety stock. But it doesn’t take into account stock which is still in production and not yet ready for sale.

What is Safety Stock?

Safety stock, also known as buffer stock or buffer inventory, is any additional product stock reserved to prevent stock-outs and out-of-stock situations.

Why is Safety Stock Important?

Safety stock removes the possibility of your fast-moving inventory running out of stock. A strategic safety stock level can lower your dependence on suppliers while also protecting against unexpected delays in the supply chain. Calculating safety stock helps keep your business running even in the face of supply fluctuations and disruptions.

How to Calculate Safety Stock

Safety stock can help protect your business against uncertainty but calculating it isn’t as simple or as straightforward as you might think.

Is There a Way to Automate Stock Management?

Managing a store or business’ stock can be a full-time job in and of itself, which is why Inventory Managers play such a critical role in supply chain management. Excellent warehouse management can lower your carrying costs, decrease lead time variability and reduce lost sales.

Why are safety stocks required?

Safety stocks are required to be maintained to provide safety against the “ stock outs ” in case actual demand is more than what was forecasted during the lead time or in case where actual lead time is more than the estimated lead time.

What happens if you don't maintain stock?

If as an inventory manager, you are not maintaining safety stocks, you are at risks of “ stock outs” most of the times. Stock outs not only results in the loss of revenue at the time when the stocks are not available, but it can be fatal to the company’s competitive position as well.

Do inventory managers have to be more accurate?

For most companies, this is unacceptable and they require their inventory managers to be more accurate in managing inventories and avoid stock outs. However, life would be easy if inventory managers are required to avoid stock outs at any cost. Unfortunately for inventory managers, this has not been the case.

How to maintain an ideal inventory stock

The ideal inventory level varies from the nature of the business, but it is safe to say that it should be optimal; meaning no over or under stocking.

What is Safety Stock?

Safety stock or buffer stock is the amount or level of extra stock that you keep in order to cover up any problems that your main inventory stock might encounter; such as a sudden increase in demands, a problem with the shipment, a problem with the availability of the product from suppliers, and many more.

To further understand the importance of safety stocks, here are the main reasons why you need it

Protects you from unexpected changes in supplies. With it, you can provide the demands of your customers even if your supplier suddenly had to close for a week, or if there is a disruption with the shipping or production of the products. For instance; accidents or natural disasters.

What is safety stock?

Safety stock is the extra quantity of a product that a company keeps in inventory to lower the risk of running out of stock for that product . We also call it Buffer stock. It is a significant thing for a retailer. It acts as a buffer, in case the sale of a product is more than the estimates. Or, if a supplier is unable to deliver the product in ...

What happens if a company fails to estimate the safety stock level accurately?

If a company fails to estimate the safety stock level accurately, it could result in the loss of revenue, customers, market share, and profit. A simple thing that a business must never forget is if you can’t meet the demand of your customers someone else will.

Why is buffer stock important?

The primary objective of keeping a buffer stock is to keep your customers happy. If you are always able to meet your customers’ expectations, then they will not only keep coming back but will also recommend you to others.

What happens if you have buffer stock?

If you have a buffer stock, you and your workers won’t have to worry about producing more products in an emergency. This way, they can focus on meeting the orders, rather than running around in chaos.

Can you adjust the safety stock level from the formula for seasonality?

A point to note is that you should not solely depend on the formula, instead use your trade experience as well. For instance, you can adjust the safety stock level obtained from the formula for seasonality. If you believe some months have more demand, then you can carry a bigger buffer stock.

Can you predict demand with buffer stock?

No matter how much experience a business has, it may not always predict the demand accurately. Thus, if you have a buffer stock, you will still be able to meet the order even if your demand estimates are not accurate.

Is buffer stock good or bad?

The buffer stock is a good thing from a customer satisfaction point of view, but a bad thing for the company’s cash flows. If a company invests too much money in the buffer stock, then its cash flows might get disrupted.

What Is Safety Stock?

Stock inventory usually consists of cycle stocks, or the inventory that is expected to be sold within a given period, and safety stock. Safety stock acts as a buffer amount that accounts for uncertainties such as:

How Can Safety Stock Improve Inventory Management?

Effective inventory management relies on the cushion that safety stock provides. Tracking current stock levels accurately while considering present and future market conditions and accounting for supply lead times is just the start of effective inventory control.

Why Do Businesses Need Safety Stock?

Running out of stock is an expensive issue for businesses across the globe. Stockouts result in $984 billion worth of lost sales worldwide, with North American companies alone losing $144.9 billion, according to a study by IHL Group.

How to Calculate Safety Stock

Safety stock is about more than just having a few extra units available. Different formulas help inventory managers determine how much safety stock they need and calculate some critical variables.

Complementary Formulas

These equations provide additional information to supplement safety stock calculations. They can be used to ensure that each aspect relating to safety stock is accounted for.

Common Safety Stock Challenges & Risks

Safety stock is a valuable tool to combat stockouts, but it can have some disadvantages. There are a few factors inventory managers need to consider when developing safety stock strategies.

Safety Stock Examples

Here's how safety stock works in practice: A snow shovel manufacturer knows that demand is low during the warmer months but can fluctuate significantly in the winter depending on several hard-to-predict aspects of the weather.

Spike in Demand

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 stocklevel per item or SKU...

See more on flow.space

Avoiding Stockouts

Supply Chain Disruptions