Safety stock
Last updated August 14, 2023
What is safety stock?
Safety stock (ss) is a term that refers to the extra additional quantity of an item held in the inventory to mitigate the risk of due to unexpected fluctuations in demand or supply chain disruptions.
In simpler terms, it is a buffer stock that a company keeps in reserve to ensure that it has enough inventory to meet customer demand even when demand is higher than anticipated (demand uncertainty) or when there are delays in receiving new shipments ( uncertainty).
Factors influencing safety stock
The level of safety stock depends on various factors, including:
Example
A company sells a product with a relatively stable demand of 100 units per week. The lead time for receiving new orders from the supplier is two weeks, but there is some variability in the lead time, with a standard deviation of 1 week.
To calculate the safety stock needed to maintain a 95% service level, the company would use the following formula:
Safety stock = (1.96 x 0) + (1,96 x 50) x 100
In this case, the safety stock needed would be 9800 units, which is equivalent to two weeks of demand (200 units) plus the safety stock calculated using the formula (9800 units).
By holding this level of safety stock, the company can reduce the risk of stockouts due to unforeseen circumstances in demand or lead time. If demand were to increase or the lead time were to become more variable, the company can adjust the safety stock level accordingly to maintain the desired service level.
What is the difference between safety stock and stock out?
Safety stock is a quantity of inventory that companies hold to prevent stockouts, while a stockout is a situation where the company has insufficient inventory to meet customer demand.
As a result, safety stock is a proactive measure that companies take to prevent stockouts, while a stockout is a negative consequence that occurs when a company fails to maintain sufficient inventory levels to meet customer demand.