Remember if an organization fails to keep an adequate safety stock, it can mean a loss in sales figures. It is thus necessary to maintain a balance so that you do not have to incur any loss. Only the most efficient and agile businesses can survive in a world where global supply chains and online markets dominate. Examples of seasonal anticipation inventory include buying extra chocolate ahead of Valentine’s Day, or stocking more notebooks in late summer to prepare for back-to-school sales.

Safety Stock Formulas

Every time you hit a cap on how much stock you have available, that represents the additional sales you weren’t able to make. If your average is 100 units daily, but you’ve sold up to 150 units in a day, you would use 150 as your maximum daily usage in the calculation. You have to plan for seasonality, size curves, trends and anything else that could affect your customers’ desire and ability to buy.

1. Stockouts can happen to all sorts of ecommerce companies, but some challenges make a business even more vulnerable to them.
2. You may not need safety stock for products that always sell at a consistent rate.
3. Using software that combines accounting tools and inventory tracking is a great way to keep your safety stock and reorder points in harmony.
4. Discover how Netstock’s Predictive Planning Suite™ accelerates inventory planning.
5. They have no reason to expect a surge in demand so they use Heizer and Render’s formula.

Manual Calculation

That is to say, they foresee a surge in seasonal demand or supplier pricing, and they stock anticipation inventory to better prepare for these circumstances. Making anticipatory purchases can certainly save you money, but it’ll require you to gather all materials before the price hike and while supplies are still readily available. Luckily, determining anticipatory inventory levels is a lot easier with the help of an inventory management system. accrual accounting Essentially, companies purchase and store this inventory in preparation for an anticipated future event — like a seasonal jump in sales or a forecasted increase in the costs of goods. Before you begin implementing safety stock, consider how well established your business is. Think about your current profits, the shelf life of your products, and how smoothly your supply chain runs, and then decide whether safety stock is necessary.

Factors that Affect Safety Stock Calculation

There are many factors that can affect a company’s inventory needs, so it’s always best to work with a professional to determine the ideal safety stock level for your business. To get the benefits of keeping safety stock, you need to know how much safety stock to keep. This is because too https://www.adprun.net/ much safety stock can lead to higher holding costs, and too little safety stock results in loss of sales. Using a formula will help you calculate the optimal amount of safety stock for your business. Subsequently, you would be better equipped to calculate suitable safety stock levels.

Safety Stock With a Variable Lead Time

Anticipation inventory is a necessary piece of the inventory management puzzle, because it reduces the risk of stockouts, lost sales, and disappointed customers. Anticipation inventory ensures you have all the inventory/supplies you need, well in advance of your expected sales. Let’s say your company sells an average of 10 products per day, and your lead time is about 14 days. However, during peak periods, you sell up to 15 products per day, and delays in inventory shipment mean it takes up to 18 days for products to arrive at your warehouse. Despite inventory management myths that state the contrary, safety stock is essential for your business. That’s because even the best data analysts in the world can’t accurately predict customer desires or unexpected mishaps along the supply chain.

Safety stock, on the other hand, can refer to inventory that’s held in case of supplier delays (like when there’s a manufacturing shutdown or a shortage of raw materials). The amount of buffer inventory you have will largely depend on the type of products you sell, your average production or order lead times, as well as your historical inventory data. The economic order quantity, EOQ, calculates the least expensive number of units to order. Businesses can use EOQ to meet demand while reducing the costs of ordering and holding inventory. Upon analyzing the past year’s sales data, BrewCafe noticed that their demand for coffee beans surged by 20% during winter months. Consequently, they decided to review their safety stock levels every season.

Safety stock calculations allow managers to choose their level of risk and exposure to poor services levels and weigh them up against inventory costs. A good safety stock level balances between holding costs and the costs of a stockout, determined by company priorities and industry standards. To know what your optimal safety stock is, your business needs a bird’s eye view of all your inventory.

Maximum daily usage and maximum lead time are reflected by the highest sales your historical records show and the longest lead time you can expect or have experienced. Be sure to account for delays for holidays like Chinese New Year if your supplier is in Asia. Typically, businesses do their best to predict future sales and then manage inventoryand inventory costs according to that prediction. If sales were always constant and the lead time on orders never an issue, this would be a very simple process. But not everything in business is predictable, and there can be delays in the retail supply chain. Suppliers have challenges, just like you do in your business and supply chain interruptions happen.

We live in a world where customers expect products to be in stock and hope for next day delivery if they’re ordering online. Next day delivery isn’t always viable but good inventory forecasting and safety stock means avoiding stockouts is. If you plan well, customers will trust you to have stock when they need it and will keep coming back.

Sometimes, changes in demand are caused by unexpected spikes, safety stock softens the blow in those situations. Let’s round up the result to 6 units to maintain the optimal service levels. If both your sales and lead times vary independently of each other, you can use this formula for your calculations. In this example, we have used 100 pieces of tabletops in a quarter, that is, on average, 66 working days. So we’ll divide the number of items consumed by the number of days to get the average daily usage. Safety stock is the buffer inventory that helps companies keep serving their customers when disruptions occur.

It is determined by several factors like lead time variability, forecast accuracy, and service level. Each place has a demand pattern of its own, and you have to adjust it accordingly. The Z formula involves using the Z-score (or service factor) from normal distribution statistics in relation to the desired service level, lead time, and demand.

At this point, the business should be submitting a purchase order to the manufacturer so more inventory arrives in time without the chance of a stockout. What qualifies as good safety stock (or a good amount of safety stock) will depend on a business’s maximum and average sales and lead times, as well as the nature of the SKUs in stock. The success of your ecommerce business depends on getting your products into your customers’ hands quickly and easily. You want to maximize sales, deliver orders on time, and provide an experience that drives customers to leave you glowing reviews. By having the proper amount of safety stock on hand, you can avoid catastrophic out-of-stock issues, ensuring that your customers get what they need when they need it.