Key Ways to Balance Safety Stock Levels Against Risk

Table of Contents

Get the latest e-commerce industry news, best practices, and product updates!

Reading Time: 7 minutes

We have learned through the events of 2020 that any business can be affected by elements completely outside of its control and a lot of it has to do with supply. That is why it is so crucial to have a solid supply chain and adequate safety stock level at all times. While figuring out the details around how much safety stock is too much or not enough can be a daunting task due to the drain it puts on capital; the protection it creates for your business is worth it. 

Healthy safety stock

A strategic supply chain management system is the foundation for successful e-commerce or product-based stores. Implementing this system will cut down on operational costs, increase capital, maintain business continuity, and also improve customer satisfaction. The last thing you want to deal with is delayed shipping due to low stock levels, leading to lost sales and revenue. Using the right tools and fulfillment provider can offer you the data to ensure that safety levels are always at a sufficient level reduces this risk tremendously. 

The purpose of safety stock is to ensure that there is a buffer between a stock-out and when the new inventory arrives. In this business of supply chain management, you need a balance of the right people, technology, and practices – working together to ensure consumers are receiving the correct quantity and quality of products right when they need them. 

Supply Chain Risks 

One good thing that came out of the COVID-19 pandemic was the realization that things will not always go as planned and you must be prepared for the worst, especially as an E-Commerce seller or small business owner. In the time before the pandemic, retailers worldwide lost $984 billion worth of sales due to out-of-stock items. Now, the past year and a half have had a mixed effect on E-Commerce. On one hand, the E-Commerce order volume has increased by 50+%, which should be cause for celebration, but the reality is more sobering.

With stock issues as a result of factories being shut down, transportation methods being limited, and social distancing regulations slowing efficiency, orders are taking 1.5-2x longer to arrive. 

More often than not a retail shopper will not wait for your business to restock inventory. Instead, they will move on to your competition or not buy at all. In the E-Commerce world, there are substitutes for everything so any customer turning away from you to another supplier is a huge loss. However, there are ways to ensure that your business never has to handle this problem. 

Managing Your Risk

Traditionally, the best way for a business to predict the level of safety stock needed has been to use past information regarding demand. The optimum safety stock level will be a reflection of the demand history for that product at a certain point in the year. 

Another factor to consider is the lead time or how long it will take to replenish your stock. Inventory managers can use tools to assess how likely a stock-out is based on the data they have available from suppliers and set their safety stock levels accordingly. Ideally, this should help you to find your magic number.

However, the issue with these methods of historical data and lead times, is that it doesn’t account for the unexpected. If stock and material availability change drastically, and your supply chains are delayed, or worse broken, and you only have the minimum amount of safety stock on hand you’ll be out of luck. 

It was only within the past few years that a lot of organizations realized how flawed and brittle their supply chains were. With the expansion of the E-Commerce industry and the Amazon Effect, came the expectation of speedy restocking, low lead times, and next-day delivery. This developed into business owners feeling very safe and rarely considering what they would do if shipments were disrupted. The question is, how can businesses prepare for the unexpected in the future?

What You Should do Moving Forward

Today, larger e-commerce companies and even brick and mortar locations are reassessing how they manage their supply chains and inventory levels, as well as all the connections and variables therein. In order to stay competitive, a company needs to take into consideration several factors in its supply chain and address any gaps. Key things to look for are:

  • Taking a deep dive into their supply chain and identifying any issues within their current system. This can be done by reviewing item forecasts and their current levels of stock they have within their inventory. Then, they need to weigh the cost to risk aspects around how this specific item will impact the business, if there was a disruption. How much risk are they willing to take that there won’t be a stock-out for that item? Or, how much extra stock are they willing to carry that might not move? This is something that needs to be debated on a continuous basis because cost and demand are always fluctuating, and it won’t be the same answer for everything you sell. You just need to find that sweet spot for your reorder point and keep an eye on your inventory.
  • Consider relying on multiple vendors in case of a disruption. Another key aspect to inventory management is taking a hard look at the suppliers that you use, and potentially diversifying the chain. It’s a good idea to have backup suppliers on hand in the event that you cannot acquire that product from your typical supplier. This might mean forming relationships with local suppliers so that you can acquire the product quickly if a disruption was to occur. This doesn’t come without some side effects, however. Local suppliers can be more expensive than off-shore suppliers and introduce more complexity to your processes so using them only in emergencies might be the best option.  
  • Look into end-item-level substitutions. If your goal is to keep as little safety stock on hand as possible, consider looking into substitutes. By substituting a specific inventory item to satisfy demand, you can prevent the loss of sales that would otherwise happen due to stock-out. Keep in mind, however, that this is the golden unicorn of supply chain management – finding a substitute that can replace a family of products, with cost savings that can potentially offset more expensive items. If this is not an option, using technology to have a real-time view of demand and inventory will be the best practice. 

Utilizing Technology 

Supply chains are incredibly complex, as many in the know can attest to. It’d be a mistake to leave your inventory management to chance or wait until things go wrong, to deal with the safety stock issue. Instead, you need to find a fulfillment partner that can help. In order to know the optimal amount of safety stock your company needs you will need constant access to your inventory and demand. LOCAD can offer your company personalized logistics through the LOCAD Control Tower- our exclusive cloud-based software that tracks inventory in real-time and offers your analytics in the palm of your hands.

Our goal is to integrate every aspect of your business from organizing stock, to managing internal inventory, to delivering the products to your customers. Through the combination of logistics, warehousing, and fulfillment your business will have the ability to grow and thrive in the most efficient way possible. 

Experience fulfillment by Locad today!

Experience fulfillment by LOCAD

Grow your business through Locad’s simplified and automated fulfillment solution

  • Unlimited and scaleable warehousing
  • Pay only for what you store
  • No hidden fees or lock-in periods
  • Zero inbound costs
  • Wide integration with marketplaces
  • Automated logistics and delivery
Get the latest e-commerce industry news, best practices, and product updates!

Don't miss out on the latest news!

Get the latest industry news, best practices, and product updates!

Exclusive benefits to ace your e-commerce game this 2023 with Locad’s desk calendar!