Safety stock is important for all commerce businesses — regardless of whether they’re following a Min/Max inventory system, or whether they’re dealing with cyclical and seasonal customer demand patterns.
In fact, maintaining safety stock is an essential part of capturing opportunistic sales, retaining business and making customers happy.
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Some businesses measure their excellence in customer service by their ability to maintain their safety stock levels. The goal here is to never encounter lost sales due to inventory stock outs. Customer service levels are then measured according to the number of successful orders shipped to customers.
For these businesses, maintaining safety stock levels is pivotal to this success and a vital aspect of retaining market share.
When thinking of your company’s safety stock, think of how much product must be retained within your inventory in order to never miss a sale. If you allow your inventory to run to zero before you’re able to secure your next shipment, then your company will lose business. It’s just that simple.
To avoid running out of stock as much as possible, your safety stock level must be high enough to cover your vendor’s transit time on new shipments. This transit time is the most important portion of your inventory replenishment time and is critical when determining safety stock levels.
Safety stock doesn’t just cover the transit time on shipments from your vendor. It also means accounting for your customers’ average consumption during that period.
As important as it is to cover your vendor’s delivery times, and account for daily customer consumption, you must also recognize that holding too much inventory will reduce your company’s gross profit.
Therefore, your safety stock level must be high enough to cover your vendor’s delivery times, sufficient enough to cover your customers’ demand, but not so high that your business loses money because of high carrying costs.
It’s a balancing act for sure, but it does work. Businesses make it work all the time and yours can as well. Here’s an example of how a company can determine its safety stock levels:
There is a difference between safety stock level and reorder point. Some businesses make the mistake of waiting until inventory is reduced to their safety stock before making a new purchase order.
When you’re thinking of your business’s safety stock, think of it as a backup or protection against stock outs. Meanwhile, the reorder point is the mechanism that triggers your business’s next purchase.
Ultimately, safety stock is for protecting your business against variability in demand and lead time. Otherwise, your company may encounter a situation due to either lead time delay or increased demand, which causes inventory to be unavailable for several days. In our example, this would mean not having inventory for five or more customer buying days. This would not only result in lost sales and lost gross profit, but could lead to losing market share to competitors if customers can’t buy what they’re looking for.
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