What is the safety stock
What is the safety stock and why is needed. Calculation of safety stock with statistical formulas taking the service level or simple ways.
SUPPLY CHAINSAFETY STOCK
Eduardo Domínguez Menéndez
7/10/20242 min read
What is the safety stock and its mission
Safety stock is a crucial element in supply chain management aimed at mitigating the risks of shortages caused by unpredictable factors such as demand fluctuations and lead time delays. This additional inventory acts as a safeguard to ensure smooth operations and customer satisfaction by providing a buffer against unforeseen disruptions. Determine the optimal level is key in inventory management.
Why safety stock is necessary
The necessity of safety stock arises from two primary uncertainties: demand variability and lead time variability. Demand variability refers to the unpredictable nature of customer demand, while lead time variability is due to the potential delays in any process involved in the supply chain. By maintaining an appropriate level of safety stock, supply chain operations can protect against these uncertainties, thereby reducing the risk of lost sales and production downtime.
How safety stock is calculated
There are several methods to calculate the optimal level of safety stock, from the simple average of orders advanced approaches that involves statistical methods where is analyzed the random nature of the variables involved such as lead time, service level.
The size of the safety stock is influenced by the degree of variability in demand and lead time. Also, the desired level of inventory availability, which in many cases is set by the desired service level.
Accurate forecasting is essential to minimize the required safety stock, as precise predictions of demand and lead time can significantly reduce the need for excess inventory. It is important to note that if there were no unpredictable variations in lead time or demand, safety stock would be zero.
In future articles, I will explore various methods for calculating safety stock.
For those interested in applying these methods without complex excel or other spreadsheets, the Safety Stock Calculator app, available on the App Store for iOS is a tool to calculate safety stock using different approaches.
Suggested readings and tech stuff
The following list of books is a list with the best readings to improve knowledge and awareness in Supply Chain Management, Inventory Management and Supply Chain Operations.
I also provide you a list of stuff, mainly tech equipment, for improve productivity and at work and at home. All the items are selected analizing the trade-off between price and performance.
