However, it doesn’t take demand changes into account. It uses the standard deviation of the lead time distribution, giving you a more accurate picture of your lead time and how frequently you deal with very late shipments. Heizer & Render’s formula is ideal when there are significant variations in supply on your vendor’s end. Safety stock is calculated by multiplying maximum daily usage (which is the maximum number of units sold in a single day) with the maximum lead time (which is the longest time it has taken the vendor to deliver the stock), then subtracting the product of average daily usage (which is the average number of units sold in a day) and average lead time (which is the average time taken by the vendor to deliver the stock). It calculates the average safety stock the company needs to hold during a stockout scenario, but it doesn’t consider the seasonal fluctuations of demand. This is the most simple and commonly used method to calculate safety stock. This method cannot predict business uncertainties, so using it involves a risk that you might end up carrying too much unwanted stock if your products are moving slower than forecasted. This method includes a combination of actual demand from sales orders, and forecasted demand based on statistical methods. In this method, safety stock levels are calculated over a particular time period, based on the future forecast for the product. 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. Fixed safety stock levels can even be set to zero for items that you want to phase out. The value for fixed safety stock generally remains unchanged unless the production planner decides to change it. 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. There are several different methods to calculate safety stock:įixed safety stock is a method used by production planners. Using a formula will help you calculate the optimal amount of safety stock for your business.Įach method of calculating safety stock uses slightly different details, but they all require you to know your lead time, which is the time between the initiation of an order and the completion of the delivery process. This is because too much safety stock can lead to higher holding costs, and too little safety stock results in loss of sales.
To get the benefits of keeping safety stock, you need to know how much safety stock to keep.
If you’ve got enough safety stock during these unpredictable situations, it can help you avoid the costs of buying stock at higher prices without sacrificing sales. This can be due to a sudden scarcity of raw materials, an increase in price of raw materials, unexpected demand surges in the market, new competitors, or new government policies. Unpredicted market fluctuations can cause the cost of your goods to increase suddenly. During these situations, safety stock acts as your defense against a possible stockout scenario and helps you fulfill your orders until your ordered stock is delivered to you. Unexpected delays in production or transportation, such as a bottleneck at your supplier’s end or a weather-related shipping delay, can cause your products to reach you later than expected. It ensures that your company doesn’t run out of popular items and helps you keep fulfilling orders consistently.Įven if your supplier has been consistent with delivering products on time and you’ve never faced a supply lag yet, this might not always be the case. It serves as a cushion when the products you’ve ordered take longer to reach your warehouse than you expected. Safety stock protects you against the sudden demand surges and inaccurate market forecasts that can happen during a busy or festive season. Let’s see how safety stock is important for your business: Safety stock covers you until your next batch of ordered stock arrives. 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 helps eliminate the hassle of running out of stock.
It serves as insurance against fluctuations in demand. Safety stock is an extra quantity of a product which is stored in the warehouse to prevent an out-of-stock situation.
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