What is safety stock and do you need it?

Uncertainty reigns supreme in business when it comes to supply and demand. Committing to making safety stock a part of your company’s model can help to ensure that your product supply is uninterrupted most of the time. 

But just what is it, and how can your POS system for retailers be used to make the most of it?

Safety stock vs. contingency stock.

In general, you can think of safety stock as inventory surpluses that you hold as insurance in case of typical uncertainty. By contrast, contingency stock helps to protect a business against unusual or unforeseen events, such as a war or pandemic. 

While you only need to invest in contingency stock if your products are essential for the protection of life, or if you have concerns about the reliability of a supplier and have no other sources, safety stock is another story. 

There are three factors to consider when deciding the extent of safety stock that you need to obtain for your business.

The nature of your demand.

Demand is not static. It can change in numerous ways and be predictable or inconsistent, uniform or variable, etc. You can improve your inventory management by using tools to analyze what your demand looks like, which customers are buying what items, what times of the year it is at its highest and lowest, and much more. 

Ultimately, these metrics will help you to determine your safety stock.

Supply chain service levels.

The 2020 pandemic brought the weaknesses in our general supply chain logistics into stark relief. 

Many goods were only available in limited geographical areas or from single sources, and others were at the mercy of broken links in the chain that left businesses and customers alike desperate for merchandise.

It is impossible to have total control over your supply chain. However, communications and inventory management tools, when effectively harnessed, can take a great deal of the guesswork out of optimizing the supply chain. 

The more open and bilateral are your lines of communication with third-party vendors, the better will be your chances of obtaining and retaining safety stock at the levels that will meet customer needs without resulting in a costly overage.

Planning methodology.

If you do opt to invest in safety stock, your task is to determine how much to get. You can do so in one of two ways. One strategy is to make your best guess based on how to replenish quantities in order to fulfill an expected average demand. 

Alternatively, you might opt to order supplies based on a given static forecast.

How to calculate the safety stock you need.

There are various techniques that you can use to determine safety stock quantities. One idea is to buy the estimated amount of a specific product that you will need over a set time period in order to cover any unknowns.

Another idea is to use historical data from your POS system for retailers to estimate the maximum amount you will need over a specific time period and then to buy inventory accordingly. 

Finally, you might choose to estimate your suppliers’ ability to fulfill your needs and then determine what percentage of that amount you can tolerate.

How to calculate safety stock.

Although this figure can be complex, calculating it doesn’t need to be. Start by finding the following for each SKU: maximum daily usage, maximum lead time, average daily usage, and average lead time. 

Then multiply the maximum daily usage by the maximum lead time. Then multiply your average daily usage by daily lead time. 

Finally, subtract the average number from the maximum number to calculate your safety stock amount.

In general, accurately determining your optimal safety stock will protect your business for most extreme scenarios. While you may not be able to meet the demand in the event of extreme sales jumps, you will at least prevent most stock outages.

Running a successful business requires that you juggle a seemingly infinite number of variables. These include working with suppliers, adjusting to changes in inventory acquisition and demand, providing a smooth product delivery experience for your customers, addressing delivery delays, predicting and preemptively ordering to accommodate upcoming trends, and so much more. 

Gaining an understanding of safety stock can give you the inventory cushion your business needs to thrive in a chaotic and unpredictable commercial landscape.