To ensure the viability and smooth operation of your business, its success relies on both customer demand and the supply chain (reordering from suppliers). Any unforeseen event or disruption can quickly jeopardize your operations, making it essential to establish safety stocks to anticipate any logistical dysfunction.
Discover all the solutions and tips here to effectively implement and closely monitor your safety stocks and reorder points using efficient inventory management methods. Learn how to calculate your ideal stock levels with a precise formula, ensuring optimal service while reducing delivery times and optimizing sales and the reordering process.
Safety stocks represent the inventory level that mitigates stockouts or shortages caused by unforeseen events. Also known as buffer stock, it serves as a buffer and remains completely immobilized, only to be used in emergencies. It serves to address any unforeseen or sudden events occurring in your inventory or supply chain that could endanger your operations. Thus, your safety stock is fundamental for effective inventory management.
It's in your company's best interest to create a safety stock to shield itself from these uncertainties. Therefore, backorders must be handled skillfully.
If you're unsure about the performance of certain products, incorporating safety stocks may prove unnecessary and cumbersome. Therefore, you must analyze your stocks to identify products requiring special attention.
Consider the following criteria for each of your products:
The higher the storage costs compared to opportunity costs, the less significant your safety stock level will be. Conversely, if opportunity costs outweigh storage costs, your safety stock level will be higher. While stockouts have a negative impact on the business, overstocking also incurs additional costs!
The more incidents your product faces, the more it will require safety stocks.
If you aim to provide high levels of customer service, implementing safety stocks ensures customer satisfaction. You can then use the Pareto principle, particularly the ABC method, to identify products to include in your safety stock.
Several methods are available for calculating safety stocks:
Here's the calculation of the "expert" method, more suitable for small businesses:
Safety Stock = (Maximum Daily Sales - Average Daily Sales) + Lead Time
Let’s consider this example:
Your pen company sold 1,128 units in March.
Per day, the average sale is 1,128/31 = 36.4.
The maximum daily sale of pens is 42.
The lead time is approximately 2 weeks, or 14 days.
The safety stock will be:
42 - 36.4 = 5.6
5.6 x 14 = 78.4
Your pen company should place an order as soon as stocks reach 79 units.
You now know from which stock level you need to reorder.
Now, it's about determining the Economic Order Quantity (EOQ) for cost optimization.
Also known as the Wilson formula, EOQ involves ordering the appropriate quantity of products to minimize annual inventory management costs. It requires balancing:
For more information, read our article.
Reorder point (ROP) differs from safety stock, as it precedes it.
A reorder point corresponds to the minimum inventory level of a product. When reached, it immediately triggers backorders without touching the safety stock, which should only be used in case of absolute necessity.
To calculate your reorder point, click here!
Although having safety stocks may seem reassuring, be careful not to use them to conceal underlying issues: poor inventory management, bad forecasting and data management, outdated calculation formulas, lack of communication with suppliers, etc.
Also, beware of manually entering your safety stocks. The risk is that your sales may evolve without adjusting your reorder point, thus distorting your backorders. You need a dynamic and evolving formula over time to adapt to seasonality and other parameters. Nothing beats equipping yourself with an inventory management software.
Furthermore, not all safety stock calculation methods account for seasonality. Therefore, isolating the time factor is important to get coherent results, calculating your safety stock per day rather than per month.
However, unforeseen elements can completely contradict your calculations.
Finally, be mindful of the quantity of stocks covered by your safety stock. Inventory immobilization has a cost and can quickly become a problem. To prevent your safety stock from becoming dead stock, we provide all the keys in the article.
Let’s not forget that safety stocks should only be used to guard against uncertainties, stockouts, or shortages that could disrupt your supply chain.
Ignoring or minimizing lead times can result in insufficient safety stocks, leading to stockouts and affecting the level of service provided to customers.
Failing to regularly review safety stock levels based on sales trends, product changes, and market conditions is a mistake that can lead to stock obsolescence or, conversely, overstocking.
Applying a single formula or general rule for all products and situations without considering each product's specificities, seasonality, demand volatility, or specific supply risks can lead to inadequate safety stock levels.
This type of stock represents the quantity of products needed to meet demand while awaiting the next order. Optimal management requires a good understanding of lead times and sales volumes, allowing cost reduction while maintaining a high level of service.
These are products that are no longer sellable or are obsolete. Effective inventory management involves identifying and minimizing dead stock to optimize storage space and reduce financial losses.
This stock includes products in transit from one point to another. Managing this type of stock is crucial for businesses with extensive supply chains, as it directly affects delivery times and customer satisfaction.
Companies may decide to increase their stock in anticipation of increased sales, rising raw material prices, or supply disruptions. Managing this stock requires accurate market analysis and a good sales forecasting method.
In this model, the stock remains the supplier's property until it is effectively sold. This system can help reduce stocks in the company and improve service level management while sharing risks between the supplier and distributor. Learn more about selling on consignment.
In conclusion, the best solution to effectively manage your stocks and avoid malfunctions or stockouts is to equip yourself with an inventory management software like Erplain. Get real-time visibility of your stocks and handle all your business management needs, automating the calculation of your safety stock, reorder points, etc.
Want to learn more? Request a demo.
