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A strategic supply chain management system is vital to the success of any product-based operation. It can lead to increased customer satisfaction, reduced operational costs, and steady cash flow for your business. Consider this: an unexpected delay on a shipment of car parts can cost an auto assembly plant $20,000 per minute. With data-based safety stock calculations, they could drastically reduce the likelihood of unexpected delays.<\/p>\n
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The successful execution of a supply chain management strategy is complex. You have to roll all of the people, processes, and technology together to get the right product, in the right quantity, to the right customer, at the right time.<\/p>\n
Safety stock plays an important role in mitigating some of the supply chain risks inherent in your business. In order to help your business stay ahead of unexpected events, safety stock inventory gives you the buffer you need between a potential stock-out and inventory arrival.<\/p>\n
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BONUS:<\/strong> Before you read further, our team has put together a simple safety stock calculation excel that helps you identify how much inventory to carry for each of your products. Download safety stock formula excel here.<\/a><\/p>\n Safety inventory, also known as buffer stock, is the extra inventory you order. It\u2019s the stock you need for when the inevitable happens. Whenever demand is greater than expected or there\u2019s a delay from your supplier, safety stock ensures a customer doesn\u2019t walk out the door empty-handed and disappointed.<\/p>\n Stock-outs, or the moment that your product is out of stock, present a $1 trillion problem. Retailers worldwide lose $984 billion worth of sales<\/a> due to unavailable items. North American businesses claim a whopping $144.9 billion of that figure. The fact that consumers won\u2019t wait until a business does stock and inventory replenishment<\/a> to its shelves further compounds the issue.<\/p>\n The Internet is an easy scapegoat. Rather than wait, many customers turn to Amazon when they can\u2019t find a product. We can’t blame eCommerce though. Customers are only using a new tool to act on the old behavior.<\/p>\n According to a 2004 study published by Harvard Business Review, 21% to 43% of shoppers went to another store<\/a> when they couldn\u2019t find a product rather than looking for a substitute in the same store. Whether customers are turning to the Internet or brick-and-mortar stores isn\u2019t the issue. It\u2019s the fact that they\u2019re turning away, period. And they\u2019re turning away because stockouts erode customer trust.<\/p>\n Consider your average customer. When they get in their car and make a trip to the store, they make a trade-off. The time they could have spent doing something else goes towards visiting your store. They believe, based on your advertisements or your store category, that you\u2019ll have the desired item in stock. If it isn\u2019t there, they\u2019ve essentially wasted their time. They\u2019ll look elsewhere, find a substitute, or go without.<\/p>\n Ordering extra product, or safety quantity, is one way you can avoid stock-outs. Safety inventory is the buffer room in your inventory that protects you if:<\/p>\n Safety stock inventory is different from your cycle stock, which is the stock you expect to sell based on your demand forecasts<\/a>.<\/p>\n But, safety inventory isn\u2019t a band-aid solution for stock-outs. A common pitfall for inventory managers is ordering too much inventory. This introduces new and expensive problems. A significant surplus means higher carrying costs on things like rent, wages, and insurance. There\u2019s also the cost of potential damage, spoilage, and theft.<\/p>\n But how do you end up with too much or too little safety inventory? Oftentimes, it\u2019s because you\u2019ve used an undisciplined approach to calculating the safety stock formula.<\/p>\n Some choose an arbitrary percentage, say 15%, and order that much extra product at each inventory reorder point<\/a>. Worse still, others choose to go with their gut and guess each month.<\/p>\n Ideally, all companies should adopt a math-based approach to determining safety stock. This means applying and customizing safety stock formulas to meet business needs based on historical data. To take this approach, companies must pull the following information from their Supply Chain Software:<\/p>\n In addition, businesses should also know their desired service level. In most B2B relationships, this is formalized in service level agreements. For B2C companies, senior management determines this number by balancing the cost of stock-outs or unfulfilled promises against the cost of losing customers.<\/p>\n With this information in hand, your business is one step closer to properly setting its safety stock levels.<\/p>\n When it comes to calculating safety inventory, it doesn\u2019t pay to go with your gut. It may cost you.<\/p>\n Guess too high, and you\u2019re left with extra inventory and all of the costs associated with managing it.<\/p>\n Guess too low, and you\u2019ll have stock-outs which can lead to dissatisfied customers.<\/p>\n Using a safety stock formula lends legitimacy to your logistics strategy. It\u2019s also a more compelling way to present your reasoning to management.<\/p>\n While there are variations, we\u2019ve provided the simplest safety stock calculations below as well as a step-by-step guide on how to implement it.<\/p>\n <\/p>\n Safety Stock Equation = Z \u00d7 \u03c3LT \u00d7 D avg<\/strong><\/p>\n \n<\/div>\n Let\u2019s break this safety stock formula down to understand its component parts.<\/p>\n Z represents your desired service level. You have to determine this level for each product. This number represents a company\u2019s inventory costs for a certain product versus the missed opportunities due to a stock out. As such, this number varies for each company since the cost of missed opportunities varies from company to company.<\/p>\n Unfortunately, there is no easy \u201cplug and play\u201d approach to determining your service level. This is highly specific to your business and your customers, and it\u2019s an instance in which data is your best friend. As a starting point, ask yourself what customers are willing to put up with. If you know how many delays or \u201cscrew-ups\u201d it takes to lose a customer, you can set a target to avoid this.<\/p>\n Generally speaking, the service level in the retail industry is 90%<\/a>. High-priority items get a service level of 95%.<\/p>\n Once you have your percentage, you will need to express it as a factor to use it in your formula. The easiest way to do this is to go into excel and use the following formula (=NORMSINV (X%)) or you can refer to a service level factor table<\/a>.<\/p>\n For this example, let\u2019s say your desired service level is 92%. Your service factor is 1.41<\/strong>.<\/p>\n \u03c3LT is the standard deviation of lead time. To find the standard deviation of lead time, you\u2019ll need historical data on your lead times (to calculate your average lead time) and your actual lead times. The more data you have, the closer to reality this number will be.<\/p>\n For example, let\u2019s say your average lead time (expected lead time) is 15 days. The following is the data you have on the last 10 orders.<\/p>\nWhat Is Safety Stock Inventory And How Can It Improve Your Inventory Management?<\/h2>\n
How Does an Empty Shelf Chip Away at Customer Trust?<\/h3>\n
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Calculating the Level Of Extra Stock: How to Use the Safety Stock Formula<\/h2>\n
What Is Z?<\/h3>\n
What Is \u03c3LT?<\/h3>\n
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\n Actual Lead Time (in days)<\/strong><\/td>\n Expected Lead Time (in days)<\/strong><\/td>\n Deviance<\/strong><\/td>\n<\/tr>\n \n 15<\/strong><\/td>\n 15<\/strong><\/td>\n 0<\/strong><\/td>\n<\/tr>\n \n 13<\/strong><\/td>\n 15<\/strong><\/td>\n +2<\/strong><\/td>\n<\/tr>\n \n 12<\/strong><\/td>\n 15<\/strong><\/td>\n +3<\/strong><\/td>\n<\/tr>\n \n 14<\/strong><\/td>\n 15<\/strong><\/td>\n +1<\/strong><\/td>\n<\/tr>\n \n 16<\/strong><\/td>\n 15<\/strong><\/td>\n -1<\/strong><\/td>\n<\/tr>\n \n 16<\/strong><\/td>\n 15<\/strong><\/td>\n -1<\/strong><\/td>\n<\/tr>\n \n 18<\/strong><\/td>\n 15<\/strong><\/td>\n -3<\/strong><\/td>\n<\/tr>\n \n 11<\/strong><\/td>\n 15<\/strong><\/td>\n +4<\/strong><\/td>\n<\/tr>\n \n 15<\/strong><\/td>\n 15<\/strong><\/td>\n 0<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n