Safety stock refers to the buffer inventory or extra stock stored in a warehouse to mitigate out-of-stock situations during an unexpected increase in demand. It protects companies when ordered products take longer to reach the warehouse than expected.
Significance of Safety Stock Formula in an E-commerce Business
The Safety stock formula eliminates the hassle of running out of stock and missing out on profits. It offers multiple advantages, such as:
1. Ensuring protection against such inconvenient out-of-stock situations
2. Serving as a shield against stocked-out situations until the fresh stock arrives
3. Shielding your business from disruptions like transportation disruptions, natural disasters, unavailable raw materials
4. Preventing sales by helping you hold safety stock in your inventory
5. Mitigating the impact of price fluctuations due to a scarcity of raw materials. A buffer inventory can regulate such uncontrollable emergencies.
Applications of the Safety Stock Formula
Holding excess stock can be a bit costly, and that is why a formula is needed to avoid the risks of stockouts or margins of error. If a company cannot afford to exhaust the supply of a product, setting an adequate inventory level for that product may help. The formula for safety stock, thus, helps businesses save money, increase their storage spaces and improve their overall efficiency.
Safety Stock Formula
maximum daily use = maximum number of units sold within a day
maximum lead time = longest time the vendor takes to deliver the stock
average daily usage = average number of units sold within a day
average lead time = average time the vendor takes to deliver the stock
Even though other formulae can be used to calculate safety stock levels, the retailer’s needs and specific factors that can impact the stock determine the selection of the optimum stock level formula.
How to Use Safety Stock Formula for Business’ Turnover Ratio?
Let us assume that a company has 12300 sale quantities and 12 deliveries over the span of 12 months with a maximum lead time of 15 days and a maximum sale of 1400 items.
Maximum sales within a day: 1400/30= 46.03
If the average lead time is 11 (in days) and the average daily sale is 33.70, the safety stock can be calculated by applying the safety stock formula:
Safety Stock = (15 * 46.03) – (11 * 33.70) = 319.73 ≈ 320 Units
The safety stock formula helps an e-commerce business maintain optimal stock levels in a warehouse. This safety stock safeguards the business during an unexpected surge in demand or production delays that affect the supply chain.