What is safety stock and how do you calculate it?

No unpredictable surge in your product’s popularity leaving your supplier unable to match demands, no breakdowns of production machinery needing days of repair, no snowstorms or typhoons (or other weather related troubles affecting your stock)… basically, nothing unexpected happening. Now, if only that was possible…

Well, we live in the real world, and supply chain problems happen.  

As a retailer, how do you handle these incidents? Stop selling until everything goes back to normal? Of course not. Backordering works, but if you’re in a business where everything’s about instant gratification, you risk losing out on sales and customer loyalty. So what can you do to guard against unexpected incidents and keep your customers happy?

The answer lies in safety stock. Safety stock is like a small emergency warchest you can break out when the going gets tough and it looks like you’re on the verge of selling out. You’d want to have enough in it to help you weather the storms when they roll around, but not so much that the carrying costs end up straining your finances. While this sounds like common sense, the trick is to decide on how much safety stock to carry.

There’s the temptation to stock enough to last you until a fresh shipment (or two) comes through, but always remember that the more you stock, the higher your carrying costs become. Just think about it; whatever you sell doesn’t just have to cover its own carrying costs - it has to cover the carrying costs of the safety stock as well.

Safety stock formula: How to calculate safety stock?