How to calculate safety stock
Owners and inventory managers must determine the optimal stock levels without incurring high carrying costs. They can use the safety stock inventory formula to calculate the ideal level of inventory.
To determine the safety stock level required for a specific product, you will need to know the daily usage of that product and the average lead time for reordering the product.
It is always best to keep track of your business's products' demand, standard deviation, and maximum lead time average. With that in mind, you can use the safety stock inventory formula below:
[Maximum Daily Usage of Product x Maximum Lead Time of Product]
-
[Average Daily Usage of Product x Average Lead Time of Product]
= Safety Stock
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This safety stock calculation can then determine the reorder point for that product. The reorder point calculation illustrates how many days the business will go before reordering the product and starting the safety stock on hand. This formula is as follows:
Safety Stock + Average Sales x Lead Time = Reorder Point