What is Safety Stock: Definition, Formulas & Purpose

Let’s say you are expecting a shipment of two-wheeler parts and accessories. But suddenly you get news that there is an unexpected delay and your customers are disappointed about it. Now, you stand the risk of losing business and money.

Stock management is one of the biggest challenges that retail shops face today. Because demand is constantly changing, it affects how and when products or parts must be stocked. 

Safety stock formula gives you a scientific approach to managing your inventory, boosting sales, and increasing profits. Before we look into the formula to calculate safety stock, let’s understand what is safety stock and what it means.

Safety stock refers to extra stock that you hold, in case you think that demand for a particular product may increase suddenly. So, you keep additional stock above the desired level that you would typically keep for daily operations. 

You need a safety stock strategy to protect you from outside factors over which you have no control. These factors are: 

1. Uncertainty in Demand

As a retail store owner, you are aware that some products sell well all year round, and some products do well only in certain seasons.

For instance, shaving blades are popular throughout the year, so you know when and how much to reorder. If you receive consistent supply and demand, you would not need to go in for large amounts of safety stock.

But on the other hand, a product like blankets may be popular only during the winter season. But what if there is a sudden cold wave and the demand shoots up? In this case, you need to get more safety stock of blankets than shaving blades. 

2. Uncertainty in Lead Time

Every manufacturer and company that assembles products with various raw materials or components require lead time. It is an essential factor that decides minimum inventory and safety stock needs. 

There are numerous ways to arrive at safety stock. Some of these include:

• Fixed safety stock
• Time-based calculation
• The general formula
• Heizer Render’s formula
• Greasley’s method

Here we look at Greasley’s method as an excellent place to start calculating your safety stock.

The most straightforward safety stock formula that you can use is Greasley’s method which is as follows:

Safety Stock = Z × ?LT × D avg

Let’s break down this formula to know what it stands for.

• Z = Desired Service Level 

As a shop owner, you need to decide this level for every product and category. 

• ?LT = Standard Deviation of Lead Time 

To know the standard deviation of lead time, calculate your average lead time and the actual lead time. For example, let’s assume your average lead time is 15 days. So, based on the last ten orders, you may have the following data:

To know the standard deviation in the above table, you need to find the difference between the actual lead time and the expected lead time shown in the third column.

When you add up the deviations, you can get your standard deviation. 

So now, Standard Deviation = 5

When you divide this by the number of orders, you get 0.5. You must then add this number to the average expected time of 15 days. 

Therefore, based on the calculations, your standard deviation of lead time is now 15.5 days.

• D avg = Demand Average 

To know your demand average, you must arrive at a time frame that is generally the amount of time between orders. For instance, say you reorder supplies every month. Based on a reorder of 30 days, let’s look at the below table:

Based on the above table, add the units you have sold and divide them by 30 days. 

1,895 / 30 = demand average of 63.2 days.

Now that you have all the variables, you can use them in the safety stock formula as follows:

Z × ?LT × D avg = Safety stock 

1.41 x 0.5 days x 63.2 items = 44.6 items

Hence, your safety stock is 44.6 items.

When you calculate safety stock accurately, it can save you lots of money. Review your inventory data, lead times, stock levels and more in real-time with stock management app.

With Zadinga, you can quickly eliminate inefficiencies and ensure that your shop shelves are stocked at all times. Take a step to keeping your customers happy, coming back for more and boosting your business with Zadinga today.