What is a safety stock?
When storing and temporarily storing goods for production or sales, it is very important to find appropriate stock levels. Many companies and production facilities therefore have their own inventory managers who are tasked with this difficult job of ensuring uninterrupted production and continuous shipping. In addition, the aim is to prevent too much capital being tied up, which happens with unnecessarily high stock levels. In addition, the costs for storage also increase.
One of these stock levels is the safety stock, also known as minimum stock, reserve stock or iron stock. If the stock falls below this level, there is a risk that demand can no longer be adequately met. Production may suffer as a result, but sales may also be lost or customers may drop out.
The advantages of a safety stock are
- Protection against unexpected changes in demand and / or incoming goods
- Protecting production and the supply chain
- Delivery failures can be avoided
- Protection against inventory uncertainties
How is the safety stock calculated?
The safety stock serves as a buffer for each stored product. It is therefore calculated in addition to the basic stock. This means that production and delivery capability can always be guaranteed, even if there are uncertainties.
Such uncertainties can be deviating stocks, for example if there is less of a product in the warehouse than there should be. However, different procurement times, volatile demand and the difficulty of forecasting also play a role. It is therefore particularly important to assess the basic stock correctly so that an appropriate safety stock can be added to it. Just the right amount must be found to ensure that there is still a sufficient buffer, but without incurring excessive additional costs.
Three different methods can be used to calculate the safety stock:
- Fixed safety stock
- Time-based calculation
- Statistical calculation
Overview of calculation forms
- The fixed safety stock is the simplest way of calculating this stock level. A fixed number of articles or goods is defined, which must be in stock at all times. In most cases, however, the individual items are not considered separately, but rather the entire inventory as one. This can lead to high inventory costs or even supply bottlenecks due to fluctuating demand.
- With time-based costing, the safety stock is calculated for a fixed period of time. For example, a weekly average is then calculated for outgoing goods. The value of this weekly average must then also be in stock at least once. However, in this calculation there is no link to the time required to procure the goods. As a result, larger quantities are often stored than necessary, which also ties up more capital.
- In the statistical calculation, the optimum safety stock is determined using a probability calculation. Both past inventory values and demand forecasts play a role here and are included in the calculation. The results are usually better than those of time-based or fixed costing. In addition, many warehouse management systems already calculate the safety stock themselves using this method.
An example of the calculation of the safety stock
In practice, there is a simplified formula that includes both the replacement time and the daily requirement.
If a stored item has a daily issue of 600 pieces and the time for replenishment is 7 days, this calculation results:
1/3 x consumption in the replacement period = safety stock
so
1/3 x (600 units x 7 days) = 1,400 units safety stock
