Safety stock is the number of products a business keeps on hand as a buffer to prevent stockouts. At least, that is the basic definition. But we can better illustrate what it means by using an analogy.
It’s like how your body keeps a little bit of fat on hand to burn off when food becomes scarce. A business, just like a body, shouldn’t accumulate too much fat because that can lead to all sorts of health problems. You need to find a healthy balance between gorging and starving. That is just common sense.
Safety in Numbers
Before we get too far into this subject, we should ask a simple question: how much should your safety stocks be? That depends on many factors. Such as how long it takes to receive products after they’re ordered, the average number of sales in a given time period, and standard deviation. Also, there are a bunch of other factors that would take quite a while to explore. If you are interested, they are definitely worth checking out. For an in-depth discussion of calculating safety stock, read the article “Optimizing Safety Stock.”1
The problem is it can take quite a while to calculate safety stock number for every product you sell. To make this task easier, you can use inventory management software. Instead of having to manually do this job, you can let the software automatically calculate safety stock number. So that takes a big job off your plate while maintaining the service level your customers enjoy.
Better Safe than Sorry
Better safe than say. That is a common phrase, but is it true in business? For example, is it better to keep your money safe in your savings account than to be sorry you spent it on inventory that just sits in your warehouse? Of course, it’s also essential not to displease customers by running out of products when they want them. That’s why it’s so important to get your safety stock or buffer stock right.
While planning your safety stock inventory, you need to have both minimum and maximum quantities. Because it’s possible to have too little and too much safety inventory. Thus, you should keep an eye on the extremes. Thankfully, inventory management software lets you establish minimum and maximum quantities on every item in your inventory.
Once an item reaches its minimum quantity, the software will generate a purchase order. And when it generates a purchase order, it will order enough items to keep you below the maximum level.
Safety First
What comes first for a company – profit or customer service? If you optimize your safety stock or buffer stock, you don’t have to choose between the two. Optimized inventory control can improve your profit margin and customer service at the same time. By keeping just enough products on hand to cushion the blow of sudden increases in demand, you protect your bottom line while also satisfying customers.
Safety stock is a moving target. So you can’t just calculate it once and forget about it. You need to refine it from time to time so it can help you adapt to changing circumstances. Since you don’t have all the time in the world to focus on this one aspect of your business, you should use inventory management software. Whether you have a big or small business, it can handle this challenge well. Inventory management software can calculate your safety stock, reorder point, and more by analyzing all your inventory data.
Reasons to Update Your Safety Stock
Now that we’ve covered quite a few elements of establishing a regular safety stock level, let’s talk about some additional challenges. The following are some conditions that could force you to rethink your safety stock situation:
- Demand variability
- Uncertainty about how demand will change
- Disrupted supply chain
robably already know what we’re going to recommend. In order to handle these situations, try inventory management software. It can help you forecast changes in demand, make quick transfers between locations, and set up an alternate supply chain. That way, you’ll be prepared for just about any emergency.
Improve Your Safety Stock Today
You can keep your business fit and healthy by maintaining the right safety stock level! You just need the right inventory management software to make it happen. Try Fishbowl. Fishbowl is the No. 1 manufacturing and warehouse management software for QuickBooks inventory tracking. Sign up for an online demo of it today! Plenty of other businesses have benefited from Fishbowl’s advanced features. And there is safety in numbers.
Sources:
- http://www.inventoryops.com/safety_stock.htm