Showerhead C sees actual sales that are higher than the predicted forecast, but the safety stock fails to cover the actual demand in week four, falling short by 25 units. Showerhead B sees actual sales slightly below forecast, so a surplus of 290 units are remaining, made up of 250 units of safety stock but also 40 units of excess stock, tying-up much needed capital. Showerhead A sees actual sales that are higher than the forecast, but the safety stock does its job by providing enough stock to cover the rise in demand with 295 units of safety stock remaining. Mary’s forecasts show that demand for Showerhead C could be much more erratic than A or B, but still decides to use her average weekly demand as her safety stock quantity.Īs we can see from the actual sales figures: This can be seen if we look at each SKU in turn. As a result, managers get inventory imbalances that can lead to excessive inventory costs and/or inconsistent service levels. Forecasts based on historical consumption alone cannot account for this.Īt the same time, lead times can be inconsistent due to a range of issues, such as production downtime or delivery delays.īy definition, a ‘one size fits all’ approach to calculating safety stock will deliver the right amount of inventory for some items, but too much or too little for others. This is because each SKU in your inventory has a unique demand pattern: some will have steady demand, others will be more lumpy or erratic. In reality, of course, this rarely happens.įor starters calculating demand based on historical sales alone often leads to inaccurate forecasts – read more here. One reason for this is because both approaches assume that the forecasted demand will be accurate and that lead times will remain consistent. However, just like using the fixed safety stock method, time-based calculations can also often lead to over- and under-stocking. Time-based safety stock calculationsĪ time-based safety stock calculation finds the average sales over a fixed period of time and uses this value as the safety stock level.įor example, if Mary uses her average weekly forecasts (based on last month’s sales) to calculate safety stock, she would end up with 525 units of safety stock of Showerhead A, 250 extra units of Showerhead B and 475 of Showerhead C. For example, Mary may end up with unnecessarily large amounts of capital invested in excess stock of Showerhead C, whereas she could easily run out of Showerhead B. This basic approach is easy to set-up and manage, but often leads to stock imbalances. She could now simply decide to carry one week’s worth of safety stock for each SKU, using last month’s highest week of sales as her safety stock figure e.g.

Mary has reviewed her previous month’s sales and used these figures to set her forecast for the next four weeks: Let’s introduce Mary’s Plumbing Warehouse as an example. This number is often set at item group level and based on the judgment or assumptions of the inventory management team – there are no formal calculations used. Many companies set a fixed level of safety stock for their inventory items – that is, they add a ‘best-guess’ quantity to the reorder point to allow for any issues. Here are three simple safety stock calculations with some advantages and drawbacks for each one. Three simple ways to calculate safety stockĬalculating safety stock can be as simple or complex as you make it. All too often they chose to use simple safety stock formulas, which are insufficient to deal with the supply and demand challenges they face. But, when demand and supply fluctuate, many inventory planners find it much tougher to calculate safety stock accurately. When demand for inventory items is consistent and lead times are reliable, it’s fairly easy to determine safety stock levels that will achieve this. The purpose of safety stock is to minimize disruption to order fulfilment while investing the lowest possible amount of capital in inventory. Safety stock is a key element of the reorder point formula:

Safety stock is intended to cover any shortfall in cycle stock during the lead time period. Safety stock is defined as inventory that is carried to prevent stock-outs caused by fluctuating customer demand, forecast inaccuracies or variability in supplier lead times. But if you don’t carry enough, you face stock-outs and reduced service levels. An important piece of this puzzle is to accurately calculate safety stock levels. If you carry too much inventory, you risk tying-up much needed working capital. Determining appropriate levels of stock across a business can be very challenging.

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