Using the 3,675 units it kept in reserve, the business is able to keep fulfilling orders and meeting demand. The business then puts any safety stock that’s left back into long-term storage, and continues to fulfill orders using the new inventory. What would happen if you sell as many units as your historical maximum and you experience the longest possible lead time from your supplier?

• Keep in mind that if you order new products once a week, you can calculate safety stock using maximum and average weekly usage instead of daily (or whatever your timeframe is for ordering), as your guideline.
• In most cases, inventory becomes obsolete after a certain amount of time has passed (and the items remain unsold) or when a unit gets broken slash damaged during the warehousing process.
• As a result, demand for the mug skyrockets and the business receives hundreds of orders over the next several days.

Always remember to use the same units of time measurement throughout your equations, e.g. only days or only months, otherwise, your results will be unusable. Backorders are a saving grace if and when stockouts occur, which can happen when launching a new product or even a new brand (since there’s no historical data for you to lean on). In most cases, inventory becomes obsolete after a certain amount of time has passed (and the items remain unsold) or when a unit gets broken slash damaged during the warehousing process.

In inventory management, Z score is the desired service factor—the number of standard deviations above mean demand needed to protect you from having stockouts. When you hold enough safety stock, you extend your ability to keep selling your products. You’ll eventually need your supply chain to go back to business as usual, but safety stock can postpone (and often avoid) a stockout. On another one, your supplier can’t get the merchandise to you in the usual timeframe. This is where you can tap into an additional 30 units you hold in case of unpredictable situations like this one. Consumer demand can rise and fall depending on the season, current events, and shopping trends.

Reorder point method with demand and lead time uncertainty for type I service

While CSL is an indication of the frequency of stockouts without regard to the total magnitude, fill rate is a measure of inventory performance on a volumetric basis. In the guide “Logistical Management,” authors Donald Bowersox and David Closs use the term performance cycle (PC) to denote the total lead time. For procuring raw materials, PC includes the time to decide what to order, communicate the order to the supplier, manufacture or process the materials, deliver them, and place them in inventory. Inside a manufacturing facility, the PC includes the time to decide what to produce, manufacture the material, release the material to the downstream inventory and return to the next cycle. In the event that a customer allows for a delivery lead time that is greater than the time needed to deliver the order, the remaining customer lead time can be subtracted from the PC.

• Customer loyalty increases revenue, improves your brand reputation, sparks word-of-mouth marketing, and helps you gather valuable feedback.
• The usual outcome of this approach is that inventory levels tend to be too high.
• The EOQ is calculated by taking the square root of 2 X the annual demand for a product X the cost of placing an order divided by the cost of holding one unit of inventory for a year.
• Let’s round up the result to 6 units to maintain the optimal service levels.
• Luckily, safety stock can help you make a quick pivot before you experience a stockout event.

Rely on data from your POS, market research, conversations with suppliers, and demand forecast to make the most informed safety stock call. If you have consistent sales numbers and your supplier’s lead time rarely deviates from the average, the standard safety stock formula is ideal for you. Some supply chain professionals might advise you to set your safety stock to zero. They do so because they believe this is the way to reduce overall inventory and the costs of holding it.

b. Using Textbook Safety Stock Formula:

The Heizer & Render’s safety stock method also incorporates the standard deviation of lead time distribution. However, you should know that this approach doesn’t consider changes in demand. To calculate optimal safety stock, you need to multiply product sold per day by desired days of safety stock.

Reasons for Carrying Safety Stock

Let’s round up the result to 6 units to maintain the optimal service levels. When adding safety stock to your inventory management strategy, following these basic tenets will ensure an effective implementation. Factor used as a multiplier with the Standard Deviation to calculate a specific quantity to meet the specified service level. In addition, safety stock is frequently wasted because it doesn’t sell until the next season or quarter.

What can happen if you have Less Safety Stock?

Cogsy integrates your previous sales data, purchasing trends, and seasonal analysis into one convenient and comprehensive platform. With this information at your fingertips, it’s much easier to forecast actual demand and create operational plans around your inventory needs (including your safety stock). The great thing about Greasley’s formula is that it emphasizes the impact of demand variability — whether this is caused by seasonality, promotional tactics, and so on. Just keep in mind that this method doesn’t acknowledge stock while it’s in production and not yet ready for sale. Greasley’s method is based on your supplier’s lead time and demand fluctuations.

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. Although this concept is a good idea in terms of customer satisfaction, it can also become a bit dicey for the business because you are blocking a certain chunk of your cash for creating safety stock. If your lead times are like clockwork but demand fluctuates, use this formula to calculate your buffer inventory. Safety stock is the buffer inventory that helps companies keep serving their customers when disruptions occur.

Compensates for inaccurate demand forecasting

And they’re more likely to tell their friends and family about the amazing customer experience you’ve provided. Read on to learn all the ins and outs of safety stock in this comprehensive guide. Here are answers to some of the most common questions profit margin vs markup: what’s the difference about safety stock. The PC also can be considered the time at risk, such as the amount of time between the point when someone determines how much to order or produce and the point when the next determination is made and realized.