Why is Safety Stock Important?
Safety stock serves a number of useful purposes in regularising supply chain operations. It gives a company the ability to promptly execute customer orders. It also helps a company avoid the spiral effect caused by delays, such as loss of production or failure to attain sales volumes.
Besides that, safety stock strengthens the company reliability—one of the keys towards retaining loyal customers and developing a good reputation in competitive markets. It also helps a company to avoid emergency replenishments, which are most of the time costlier than planned inventory management.
How is Safety Stock Calculated?
The ideal level of safety stock can be computed by balancing the costs against service levels. A common formula involves multiplying the standard deviation of demand by the square root of lead time, adjusted for the required service level—typically expressed as a percentage.
Advanced methods would consider seasonal demand trends, supplier reliability, and historical data regarding market fluctuations. If an organisation has been experiencing delays in supplies for a while, it can take a long time to determine an appropriate safety stock levels.
What are the Risks of Not Having Safety Stock?
Insufficient levels of safety stock expose a business to several risks, especially those related to stockouts. When a company is out of stock, customers could leave for the competitors, especially in industries where substitutes may be available.
Besides, stockouts affect a company’s goodwill, leading to the loss of customer loyalty in the long run. Economically, the absence of safety stock leads to missed sales and reduced revenue, which is disastrous for seasonal products or during high-demand periods.
How Much Safety Stock is Enough?
The amount of safety stock applied will also vary depending on industry, product type, and particular business needs based on thorough business analytics. Businesses operating in the technology sector would apply high levels of safety stock, as technology is constantly changing very fast, and demand fluctuates wildly. Companies operating in FMCG (Fast-Moving Consumer Goods) sectors would maintain very low levels since sales cycles are more regular in such industries. A seasonal business may adjust its safety stock level according to peak/off-peak periods to avoid excessive inventory holding costs.
How Can Businesses Optimise Safety Stock?
Industries with unpredictable demand might want higher levels of safety stock compared to others that experience steady demand. Inventory levels needed to be constantly reviewed to adjust the amount of safety stock according to the changing conditions in either demand or supply. This approach ensures businesses avoid overstocking or understocking, optimising costs and maintaining operational efficiency.
