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When you run with out-of-stock products, you lose revenue from having too little inventory, and you can also damage customer loyalty. A customer will go elsewhere to find the item, but as a result, they may never return to your business for that product or any other.
Out-of-stock products reduce the overall efficiency of the supply chain. There are times when running low on stock levels is inevitable, but it shouldn't be so often that it disrupts or endangers your business. Understanding how to calculate safety stock will help you avoid this situation.
Calculate safety stock automatically with the calculator tool below:
Start by adding your data abovePlease provide valid inputsSafety Stock =
What is safety stock?
Safety stock is extra inventory. It is inventory that a business holds to reduce the risk of out-of-stock products that fluctuating supply and demand create. Healthy safety stock levels help you avoid unpredictable surges, whether it is the result of inclement weather or a sudden trend.
You can track these things to the best of your ability, but business is wildly unpredictable. You can opt for back ordering to try and offset these issues, but this isn't a sufficient response for many businesses.
Safety stock is the perfect solution, without increasing your carrying costs too much.
How to calculate safety stock
To work out your safety stock calculation, you first need the formula.
Safety stock = (MDU x MLT) – (ADU x ALT)
Maximum daily usage x maximum lead time.
Average daily usage x average lead time (in days).
Subtract the average from the maximum for your safety stock calculation.
Calculating safety stock is relatively easy, but it is even easier if you use the safety stock calculator. As with any calculation, it's important that you use the correct figures.
How to use the safety stock calculator
To use the safety stock calculator, you need four figures. You need to know your maximum daily usage, maximum lead time, average daily usage, and average lead time.
This calculates the average demand so you can cover outages without holding too much stock. Once you have those four figures you just need to enter them into the corresponding fields and the calculator will do the rest.
How QuickBooks can help
Managing your inventory and cash flow as a small business can be tricky. QuickBooks can help your business track revenue and order value, helping you make better decisions when it comes to stock. Our intuitive accounting software gives you a holistic view of your business finances, from tax and expenses to invoicing and payroll.
What is an acceptable amount of safety stock levels?
There are several factors to consider when determining your optimal inventory levels. This includes standard deviation lead time and demand, sales volume, alongside inventory velocity. The general rule of thumb is the average daily inventory demand by the lead time (by the number of days).
Is there a difference between safety stock and buffer stock?
A lot of industries use these terms interchangeably. However, in many, buffer stock is used to describe the extra inventory to cover demand variations. Safety stock is the extra inventory a business holds for internal variations or supplier delays, whether it's due to weather or supply chain issues.
Why is safety stock important?
Safety stock ticks a major service factor box. By having excess stock, you reduce the risk of disappointing customers. Beyond that, through careful inventory management, you protect customer loyalty and also your sales.
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