How To Calculate Safety Stock

Stock management or inventory management is no less than a hard pillar for many businesses. The calculation of safety stock is merely a calculation of your performance that how much you have saved for any uncertainty.

Businesses must know how to cope with the situation when any abrupt calamity happens around them. This reserve amount of stock can be beneficial for businesses goodwill and worth but also for loyal customers. Because loyal customers look forward towards retailers when any scarcity prevails. The manufacturing companies come across these words every day during their work.

Safety Stock:

Safety stock is an additional stock that is made for an option to deal with the sudden demand and supply. In simple words, safety stock is an extra amount of the product which is prepared to deal with the shortage of material or insufficiency of the manufactured product.

Every company prepares this safety stock so that they should not face difficulty at the time when product demand increases and the amount decreases. 

This safety stock is also known as buffer stock as it overall maintains the stock demand. Businesses can use safety stock to prevent stockout which is caused by:

  • Changes in the demands of customers
  • When there is inconsistency in principal time for the underdone materials
  • Because of an incorrect forecast

This will compensate for the deficiency of products at the time of its excessive demand. The Art of Prediction, Service Level, Safety Stock, and Distribution are the key categories when it comes to Forecasting.

As we don’t know the exact facts and figures for the demand rate of a product so we need a second option to handle the situation. As at that time it is very difficult to get the product in time. This safety stock will help you deal with this difficult situation. 

Example:

let us take an example to clear the concept of safety stock. if we are a member of an umbrella manufacturing company. This company makes 1000 units of umbrella per month.

But as we don’t know about the demand of the umbrella so we will prepare 100 units as a safety so that if more umbrella is required than this stock can be used. This extra stock is used to maintain the mitigate risk of stockout.

As it is difficult to manufacture an umbrella in no time so some units are preprepared for saving time and for fulfilling the requirement by using stock.

Formula To Calculate Safety Stock:

The following are the steps to calculate the safety stock formula:

  • Estimate the maximum lead time for the product in days
  • Calculate the product of maximum daily usage and the maximum lead time in days
  • Also, evaluate the average lead time in days
  • Then calculate the product of average daily usage and the average lead time
  • Find out the difference between the two above calculated products. 

By following the above-mentioned steps, we can calculate the safety stock. The formula will be as follow:

Safety stock= (maximum daily usage * maximum lead time) – (average daily usage * average lead time)

This is the general way to calculate the extra stock. 

Lead time: It is the time between initiation and completion of the manufacturing process. Or simply it is the total time required to prepare the stock.

This formula gives us an approximation of the buffer stock so that we can overcome the results of stockout. This will surely prove beneficial for our business.  

Conclusion

Calculating the right number of future forecasts and reserves is crucial for merchandisers and retailers. Therefore, they keep on checking market conditions and future possibilities so that they may provide an amount of their inventory for bad days.

These rainy days are not only for businesses but also for the industry and for the whole market. Although, safety stock does not tell us the exact amount or exact figure but yes, near about to them. Therefore, stock level and safety stock calculations can save businesses from many hazards upcoming in the future. 

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