Safety stock provides protection against stock outs due to unexpected demand for a product or delays in receiving a replenishment shipment from a supplier.  It is insurance.  Like most other types of insurance, it is an expense and there is no “right” or optimum amount.  When you are determining safety stock quantities you have to ask yourself, “how much do we want to invest in preventing stock outs of this product?”

The answer will probably be different for various products you stock.  In determining the safety stock amount for a particular product, you have to ask:

  • What is the likelihood that this product will experience a stock out?
  • How disappointed will customers be if this product is not in stock?

Products are more likely to be out of stock if they experience:

  • Inconsistent supplier lead times – If vendor shipments are often several weeks late, you may want to keep some extra stock to “cover” customer demand during these unexpected delays in receiving a replenishment shipment.
  • Large fluctuations in sales or usage – You might sell 10 pieces or 1,000 pieces of a product in a month without much notice of when usage will significantly increase.

There are also some products that should nearly always be available.  These are referred to as “critical” stock items.  These are items that your salespeople and customers assume are always available, even when you experience unusually high usage.  These “never be out” items require more safety stock.

Despite what your salespeople may tell you, customers probably don’t expect every item to be in stock 100% of the time.  Even if you think they have these high expectations, you probably can’t afford to maintain enough safety stock of every item to meet every customer request 100% of the time.

Though it is evident that some items need more safety stock than others, most distributors maintain safety stock quantities with some general rules that apply to all stocked products.  Typical safety stock policies include:

  • Safety stock is equal to a fixed percentage of lead time usage (typical value is 50% of lead time usage) or
  • A specific number of day’s supply is maintained as safety stock (typical value is seven to 14 days)

Unfortunately, both of these methods result in some products having too much safety stock (unnecessarily tying up funds, suppressing inventory turnover, and taking up too much warehouse space) while other items have too little safety stock (resulting in additional stockouts and disappointed customers).

Better customer service is usually obtained at a lower inventory investment if safety stock is applied to specific items as it is needed, like taking a paintbrush and dabbing safety stock where needed.  One way to do this is to calculate safety stock quantities on the average deviation, or difference, between the forecast and actual usage over the past several months.

Next month, we will explore how to easily implement this safety stock calculation method to achieve your desired level of customer service at the lowest possible total cost of inventory.