Safety stock is an essential part of managing inventory for your business. Whether you consider yourself a forward thinker or a go-with-the-flow kind of person, you’ll be setting yourself up for failure if you don’t keep aside some of your inventory. Before understanding how safety stock can benefit you, however, it is important to learn the key elements of the inventory reorder cycle:
A reorder point (ROP) is the point where your stock should be replenished. Your ROP will vary based on your sales cycle pattern and how that fluctuates over time. Once your inventory has hit the ROP level, your inventory management system will trigger a purchase order. A good reorder point will make sure that your inventory does not go below safety stock levels.
A purchase order is an order your warehouse management system typically makes at the reorder point to purchase more inventory in order to replenish the stock that already exists.
There is often a gap between when you first make a purchase order and when the order arrives. This gap can vary depending on where the stock is being shipped from or how long the parts take to make. This gap is called the lead time, and should be heavily considered when planning your amount of safety stock.
How Does Safety Stock Work?
Safety stock, or buffer stock, is a fixed amount of extra stock you have allocated yourself to mitigate risk during lead time. Think of it as your built-in life raft; should unforeseen circumstances occur, it’ll keep your business afloat. Your safety stock level is usually below the reorder point level, but just enough to account for fluctuations in demand. A good safety stock level will ensure that your stock will never dip below 0.
Including safety stock in your inventory management plan is essential to prevent missing a sale. Safety stock is beneficial because:
It Cuts Costs
Allocating safety stock means you are managing the amount of inventory that fits your needs-- no more, no less. This cuts down on excessive inventory costs and loss of sales.
It Keeps Customer Satisfaction High
Keeping more of your products in stock means that more people are able to buy it. By keeping safety stock around, you are minimizing this risk and increasing customer satisfaction at the same time.
It Prevents Warehouse Disruptions
If you have safety stock on your side, you can prevent disruptions due to increased demand or an inventory miscount. It keeps you on the safe side of warehouse management, and gives you time to recover should a sudden inventory need arise.
How do I Calculate Safety Stock?
Calculating your buffer stock is actually easier than it sounds. There are many methods, and no one formula is the right formula, but here is a simple safety stock formula to consider using as a guideline:
Why Is Safety Stock Important for Warehouse Management Systems?
Warehouse management systems (WMS) use safety stock as an indicator for when a customer’s inventory is at warning levels. A WMS will use the indicated reordering point to create a purchase order, and track them according to inventory demand rate and lead time. Should your inventory dip below safety stock level, a WMS will automatically send you an email to warn you and recommend that you take action immediately. This way, you are never blindsided and are constantly up to date on where your inventory is in the pipeline.
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Written by Cagdas Yildiz
Cagdas Yildiz is the Chief Customer Success Officer and Co-Founder of Logiwa.