Safety stock. What is it and how to calculate it?

Knowing in detail our inventory, its status and its development is one of the most important tasks for our business to function properly. This inventory is part of stock management and its efficient management allows us to know exactly how many materials, items or products we have. In this way, we can prevent the possible scenario of running out of products when we have one or more orders at a time.

If our business is able to implement good warehouse management, it can save on unnecessary costs. Knowing the fluctuation we have of the items or products we offer makes it easier for us to make the right decisions about suppliers and the amount of stock we need to keep to meet the demands of our customers.

This also allows us to avoid future losses or excess of products that imply a higher storage cost.

There are different stock classifications, but in this post, we are going to focus on explaining what safety stock is, what it is for and how to calculate it.

What is safety stock?

As we mentioned before, it is important to plan well how our shop's stock will work, as it will have a constant flow of incoming and outgoing products. Therefore, in order to be able to provide a quality service to our customers, we have to adjust a certain amount of orders in our warehouse to cope with their needs. Here is where the safety stock plays an essential role in all our logistics, as it allows us to have a "safety cushion" to prevent stock shortages making it impossible to deliver the products that our customers have ordered.

Safety stock is the inventory that ensures the existence of products in case of a delay in the arrival of raw materials or over-ordering in extraordinary circumstances.

How to calculate the safety stock?

The safety stock is calculated on the basis of a formula. However, before dealing with the formula, it is important to consider the following terms.

• Fluctuations in demand.
• The delivery time of orders.
• Standard deviation in delivery times.
• Safety stock demand and its deviation.
• Desired demand to be achieved.

Once these are taken into account, we move to the following formula

SS=(PME-PNE)*DD

These acronyms stand for the following:

• SS: is the safety stock.
• MDT: is the maximum delivery time, which is calculated taking into account possible delays. It is measured in days, hours or any other unit of time.
• NDT: this is the normal delivery time usually used. It is measured in days, hours or any other unit of time.
• AD: means the average demand that has been calculated for that particular product in a business-as-usual situation. The measure is usually physical units of the product.

By calculating safety stock, we can have a controlled stock that will prevent supply interruptions when problems arise that may be beyond our control. In this way, we can continue to meet the needs of our customers without being affected by unexpected circumstances. To develop a more accurate safety stock calculation, it is advisable to use a management software, as it is preferable to have a safety stock for each product, time of the year or demand.

Advantages of implementing a safety stock

Logistics in retail is one of the key points to achieve good competitiveness and generate profits. On the other hand, if stock cycles are not calculated correctly, it can mean great losses for the business. For this reason, maintaining an adequate safety stock allows us to meet specific orders, even in unforeseen situations, ensuring that our customers remain loyal to our brand.

In this context, safety stock supports retailers in their quest for results that lead to customer satisfaction through adequate product availability, improved service quality and reduced logistics costs.