How to Calculate Safety Stock?
How to Calculate Safety Stock?
Safety stock, or buffer stock, is a term that is used to describe the amount of inventory or stock beyond pending orders or average demand that should be kept on hand to reduce the chance of a temporary shortfall of materials, or stockout. Stockout can lead to lost sales and lost customers. Safety stock is helpful in dealing with sudden upswings in demand or for making sure there are enough raw materials and supplies on hand to keep production going while waiting for the next scheduled delivery of materials from a supplier.
Method 1: Determining Safety Stock from Demand
Look to historic demand and demand variability to determine how to avoid stockouts. The following calculations will predict the stock necessary to achieve a certain cycle service level - i.e. the percentage of supply cycles that will result in a stockout.
Method 2: Determine average demand
Average demand is the total quantity of a material or good required each day over a fixed period. A common approach is to check the total usage of that item for a specified period, such as one calendar month or the interval between ordering and delivery of stock, and then divide by the days in that month to find usage per day.
Method 3: Consider future demand for particular stock items
Sometimes it makes more sense to consider future demand. For instance, if you manufacture car transmissions and have received a large order, you will want to factor that order into demand. In this case, you might consider calculating average demand and then adding in the demand created by the large order.
Safety stock, or buffer stock, is a term that is used to describe the amount of inventory or stock beyond pending orders or average demand that should be kept on hand to reduce the chance of a temporary shortfall of materials, or stockout. Stockout can lead to lost sales and lost customers. Safety stock is helpful in dealing with sudden upswings in demand or for making sure there are enough raw materials and supplies on hand to keep production going while waiting for the next scheduled delivery of materials from a supplier.
Method 1: Determining Safety Stock from Demand
Look to historic demand and demand variability to determine how to avoid stockouts. The following calculations will predict the stock necessary to achieve a certain cycle service level - i.e. the percentage of supply cycles that will result in a stockout.
Method 2: Determine average demand
Average demand is the total quantity of a material or good required each day over a fixed period. A common approach is to check the total usage of that item for a specified period, such as one calendar month or the interval between ordering and delivery of stock, and then divide by the days in that month to find usage per day.
Method 3: Consider future demand for particular stock items
Sometimes it makes more sense to consider future demand. For instance, if you manufacture car transmissions and have received a large order, you will want to factor that order into demand. In this case, you might consider calculating average demand and then adding in the demand created by the large order.
Great tip on calculating the safety stock
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It is worthwhile to note these points to calculate and manage inventory stocks .
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