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Safety Stock Formula: How To Use + Why It's Crucial To The Success Of Your Business | Scout Inc.

Safety Stock Formula: How To Use + Why It's Crucial To The Success Of Your Business | Scout Inc.

Anyone who runs a retail business knows that repercussions happen when an item goes out of stock for too long. Unexpected things can happen in the market that can cause a surge in orders for a particular product. This goes beyond any inventory planning when your stock is at risk of selling out all of a sudden. That’s why having safety stock is more important than ever.

There is a formula to determine safety stock levels, and it’s something every warehouse should be able to use and have in case of a sudden drop in stock levels.

safety stock formula

What Can Cause a Rapid Depletion in Stock Levels?

Even if your business has a seamless inventory management system, you should expect the unexpected. Rapid shifts in consumer demand can cause a quick change in the market, leading to over-purchasing of a product. Some things that can cause inventory to go out of stock unexpectedly include:

  • Inaccurate forecasting
  • Extended lead times
  • Shipment delays
  • Other issues along the supply chain

Mistakes happen, and inaccurately forecasting demand can also cause an unexpected surge in stock depletion. Not knowing what was going to come, means your warehouse cannot be accurately prepared.

Finally, one of the biggest reasons safety stock is essential is when lead times get pushed back, causing delays in receiving the product. Your purchasing team tries to be ten steps ahead of the suppliers and maintains a steady supply on a semi-regular schedule. However, things can still happen further down the supply chain to affect when and how orders are fulfilled.

Especially for suppliers located overseas, there can be issues with productions based on environmental factors, cultural factors, and policy changes. Sometimes products can be held up in customs for one reason or another, and some countries like China shut down everything for a few weeks during the Chinese New Year. These types of things would drastically affect lead times and how and when products will be received by your warehouse. It’s important to at least have safety stock on hand in the event that you cannot plan for these types of delays.

What is the Safety Stock Formula?

To determine your safety stock level, you will need to know four pieces of data.

  • The maximum number of units you sell per day
  • The average number of units you sell per day
  • The maximum lead time for those units (in days)
  • The average lead time for those units (in days)

Once you have those numbers available for the SKU you want to determine safety stock for, you can plug them into the safety stock formula. The formula is (Maximum daily units x Maximum lead time) minus (Average daily units x Average lead time). This formula will give you an accurate number of units to have as your safety stock. Safety stock levels will help protect your business from those unexpected delays, shortages, and fluctuations in demand. There is a super handy tool here that you can plug your data into and get your safety stock number.

Why is Safety Stock Crucial to a Successful Business?

A successful business can be measured by profits, shipping on time, and other factors that contribute to overall good business. But, the biggest thing that determines a successful business is customer satisfaction.

Without satisfied customers, your business doesn’t have sales, demand, and in the end, no profit. So it’s imperative to maintain that high level of customer satisfaction and receive excellent customer feedback. Fulfilling orders on time, without fail, is how many companies do that.

Having safety stock means having protection against late or even canceled shipments. Late and canceled shipments lead to unhappy customers and likely poor reviews. To avoid that from happening, you must maintain that safety stock to keep those orders filled, and customers happy.

Safety stock is also valuable to your business’ success because it keeps operations flowing, despite any unexpected hold-ups. Occasional mistakes and breaks in the system can be manageable. But, when unexpected shortages and delays happen, that can snowball into a massive break in your entire inventory management system.

out of stock

What Can My Business do to Streamline our Safety Stock Levels?

The first thing is to automate your inventory management system. TopShelf from Scout can help automate orders, shipment, fulfillment, and customer feedback. It allows your business to focus on putting out those fires and implementing processes to avoid them in the future. When the well-oiled machine is running on its own, it opens up more opportunities for improvement in other areas.

Second, integrate a system that automatically calculates your safety stock levels, and have your purchasing team regularly monitor those levels. There should be more than enough on-hand to be able to fulfill orders in a moment of crisis, but not too much to create an imbalance or create slow-moving inventory.

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TopShelf and other inventory management systems can help with that. But even Google Sheets and Excel Spreadsheets can help for smaller-scale monitoring of those levels. Our article about inventory checklist templates and solutions can help with that. Also, make sure that the safety stock never shows up in the actual inventory—that can mess with pricing, purchasing, and online stock levels.

Finally, safety stock can ease some of the stress of placing purchase orders and watching lead times. Although those need to be done accurately, and frequently to maintain your inventory, one missed or late PO doesn’t need to be the end of the world as long as you have an accurate safety stock level. Having those extra units not only helps with customer satisfaction but employee satisfaction as well.

For more information on how to calculate proper safety stock levels, and other warehouse automation, contact us for a free demo of the topShelf cloud inventory software. It may be just the thing your warehouse needs to level up this year.