Any Ecommerce or B2B business today wants to offer a personalized customer experience. One of the drawbacks, however, is that if products go out of stock, customers take it personally.
When there is so much focus on bespoke, smart and dynamic delivery, it’s easy for customers to forget that there’s a whole warehouse and supply chain behind their individual order. In that context, no business can afford a stockout. Warehouse managers can overcome that vulnerability in the supply chain by holding sufficient safety stock.
Find out more about why safety stock is such a key part of inventory management and how to calculate the right safety stock levels for your business.
What Is Safety Stock?
Also referred to as “buffer” stock, safety stock is a deliberate inventory surplus carried by a business to act as a cushion against spikes in demand or glitches in the supply chain. It may go against everything we typically champion in today’s lean, just-in-time (JIT), made-to-order fulfillment and delivery model, but any business that has suffered even just a few days’ disruption will recognize the value of holding safety stock on standby. The business value of carrying buffer stock covers multiple challenges, especially in B2B Ecommerce distribution where margins are so tight.
The benefits of safety stock include:
- Limits dependency on suppliers, who may not always be able to deliver (quite literally). This especially applies to more complex logistical flows or longer lead times.
- Cuts the risk of losing customers because of out-of-stock announcements. Stockouts cost American businesses more than $144 billion a year.
- Compensates for inaccurate sales forecasting.
- Allows breathing room during times of financial constraint or cashflow pressure.
- Gives insurance against price fluctuations. Businesses can use what they have in store (as a last resort) before overstretching with new stock bought at a much higher price.
The Importance of Safety Stock
With so many options for customers to choose from, customer loyalty cannot be taken for granted by any business. A study by McKinsey in late 2021, as the economy rebounded from the pandemic, found that 60% of US consumers faced out-of-stocks because of supply chain disruption. Worryingly, only 13% of them waited for a restock, while 39% switched brands and 32% switched retailers. The message is clear: disappoint your customer once and you could lose them forever.
3 Safety Stock Formulas
Inventory held in a warehouse represents a cost and a risk to the business. The aim is to carry as little inventory as possible to cover as many days of potential supply chain disruption as possible. Calculating safety stock isn’t something to “eyeball.” There are numerous formulas of varying complexity to use. The key element of each is lead time — the time between order placement and delivery — which will define how much stock a business needs to hold to be on the safe side.
1. Ballpark Safety Stock formula
For a “back of an envelope” calculation, multiply the number of units sold per day by how many days of supply your business needs to guarantee. That will give a ballpark figure, but will not accommodate any of the common variables in the supply chain.
2. Standard Safety Stock formula
One of the more common ways to calculate safety stock levels is:
Safety stock = (max. daily usage eg. units sold x max. lead time in days) – (avg. daily usage x avg. lead time in days)
This one is good for calculating safety stock with a short lead time, but is not so accurate for longer lead times.
3. Variable Safety Stock formula
A more sophisticated method, known as the variable formula, requires a calculator with a standard deviation feature. In this case, the formula is:
Safety stock = Z x σLT x D average
Z = expected orders within a given period
σLT = standard deviation of the lead time
D = average demand within a given period (number of sales within a period divided by days in period)
Businesses with longer lead times and numerous variables to consider typically use this formula.
Factors That Affect Safety Stock
Businesses will need to calculate safety stock levels throughout the year to avoid being caught out by the following:
Zero Stock
After a busy period of peak demand, many businesses will reset safety stock to zero in order to focus on clearance/discount inventory, but zero buffer stock is never advisable.
Static Inventory
As the business grows, the level of safety stock must change. Carrying last year’s levels can hold back a surge in sales if supply cannot keep pace for any reason.
Overstock
Holding too much will take up valuable space that could be otherwise allocated to current cycle stock, and increases the risk of loss due to damage, spoilage or theft.
Businesses should also be wary of automatically decreasing safety stock levels simply because lead times are reduced. There may still be other factors to consider, such as
- The supplier’s record on order delivery. They may be faster, but less reliable.
- Previous and forecast sales, particularly across seasonal spikes.
- Supply/demand uncertainty. Businesses can risk lower safety stock levels for fast-moving items that are ordered regularly (eg. consumables) but less so for impulse or seasonal purchases.
- Desired level of product availability. Customers might just show patience for a stockout on a high-ticket item that stands out against the current competition, but will not tolerate it for a regular purchase when there are numerous other brands or retailers to choose from.
How Zoey Secures Your Safety Stock
By giving your warehouse management full visibility of the supply chain from shipment to sales, you can hit the sweet spot when it comes to the level of safety stock you hold. Zoey can help you get a real-time picture of your inventory to ensure you’re never at risk of stockouts. Try a free demo today to see for yourself!
Nick Marshall is a freelance writer from the UK covering B2B marketing, emerging tech, payments and Ecommerce. He lives on a tiny island with slow internet in the French Caribbean, but was formerly an agency copywriter in the UK.
