Without sufficient safety stock, you risk a stockout that costs you sales. With too much excess inventory, your holding costs soar. So, how do you balance the risks of stockouts and overstocking? Use the right mix of safety stock calculation methods.
Discover the different techniques to calculate safety stock for each SKU. Then, find out how GAINS’s data-driven inventory management software can help you dynamically adapt safety stock and replenishment to mitigate costs and risks.
What Is Safety Stock?
Safety stock is the excess inventory you keep on hand to meet unanticipated demand spikes or supply chain disruptions. It helps you respond to market changes with agility and bounce back from supply issues with resilience.
Reorder Point vs. Safety Stock
Safety stock inventory is relevant to the reorder point (ROP), but the two concepts are distinct. The main differences in the reorder point vs. safety stock are:
- The ROP signals a replenishment order, while safety stock is buffer inventory.
- Safety stock is a variable in the reorder point equation. The equation is: Average Daily Usage × (Average Lead Time + Safety Stock).
Why Does Safety Stock Matter in Modern Supply Chains?
As a supply chain management leader, you deal with the daily volatility, uncertainty, complexity, and ambiguity (VUCA) present in modern supply chains. In today’s turbulent global supply network, tariffs, natural disasters, regulations, and political upheaval threaten to pull apart your carefully laid logistics plans. Meanwhile, rapidly changing consumer preferences complicate demand planning.
When you don’t have the amount of stock you need due to inventory management challenges, your service level and profitability suffer. Safety stock provides a boost, helping you navigate these challenges deftly.
Preventing Stockouts
Changes in demand, inaccurate forecasts, and supply issues can all lead to stockouts. Safety stock gives you time to deal with mistakes and delays before you run out entirely. When the unexpected happens, the extra inventory helps you maintain high service levels without shelling out for expedited shipping.
Managing Demand Fluctuations
Consumer demand no longer follows linear, seasonal trends from year to year. From social media trends to upcoming events to significant weather occurrences, many factors complicate demand forecasting. Account for demand variability in your safety stock strategy to capitalize on new sales opportunities and avoid overstocking.
How To Determine Safety Stock (Key Factors To Consider)
The right amount of safety stock for a specific product depends on multiple factors, including:
- Demand variability: How stable and predictable is the product’s demand?
- Lead time variability: How consistent is the lead time for inventory replenishment?
- Supply reliability: How often do suppliers deliver the right products, in the right quantities, on time?
- Service levels: How reliably do you meet customer demand with orders filled on time and in full?
Dynamic methods for finding safety stock combine these factors to balance your holding costs with the risk of stockouts. The best industry solutions process real-time data from multiple sources so you can assess variability and meet changes with confidence.
Safety Stock Formulas: Basic, Statistical, and Dynamic
While a couple of basics can get you started on the right path toward ideal safety stock levels, inventory management for businesses isn’t as easy as following a single rule of thumb. Unexpected supply and demand variables can suddenly shift the needed buffer stock amounts for different products and locations. Better inventory optimization techniques involve more complex models that account for multiple scenarios.
Basic Safety Stock Rules and Calculations
At the most basic level, you can calculate a specific product’s buffer stock by multiplying the number sold each day by the number of days of safety stock you want.
Another starting point, the 50% rule of safety stock, requires you to maintain additional inventory at about half a product’s average lead time. Following this rule, you would multiply the product’s average daily sales by its average lead time, then halve the result to reach the 50% buffer inventory level.
Both the basic formula and the 50% rule assume stable conditions and don’t account for variability. They’re intended as initial estimates, not final methods for achieving ideal inventory levels.
Variable Demand and Lead Time Formulas
When lead times are stable, but demand fluctuates, the variable demand formula can help you determine how much safety stock (SS) to hold. The formula is usually expressed as:
- SS = Z x σD x √LT
First, your desired service level percentage translates into a “Z-score” using a normal distribution chart. The next variable, σD, represents the standard deviation of demand, accounting for order fluctuations. Lastly, LT stands for “lead time.”
When lead times and demand switch roles, meaning demand remains stable while lead times fluctuate, you can adjust the formula to suit your needs. Plug in your variables and calculate using this formula:
- SS = Z x σLT x Avg D
When both demand and lead time fluctuate, the formula for determining safety stock is:
- SS = Z × √((Avg D)² × (σLT)² + (Avg LT)² × (σD)²)
Dependent Demand and Lead Time Methods
When a product’s demand relies on the demand for finished products further down the supply chain, a formula can account for that dependency. For example, car parts manufacturers know how many car parts to make by understanding near-future demand for finished vehicles.
The formula for products with dependent demand is:
- SS = (Z x σD During LT) + Avg D During LT
The same goes for products with lead times dependent on the completion of components. In our earlier example, consider the car sales staff at the end of the supply chain who interface with customers. How long it takes them to receive cars depends on how long it takes manufacturers to make, assemble, and ship parts further back in the supply chain.
Maximum Average Equation
The maximum average equation calculates the amount of buffer inventory to cover the difference between typical and worst-case safety stock scenarios. The formula reads as:
- SS = (Max Daily Demand × Max Lead Time) – (Avg Daily Demand × Avg Lead Time)
Step-by-Step Safety Stock Calculation Examples
Now that we’ve covered the formulas for the most common methods of safety stock calculation, follow two step-by-step examples to apply the equations in real-world scenarios.
Variable Demand With Stable Lead Time Calculation Example
To use the variable-demand equation, start by setting a desired service level and using a normal distribution chart to find the corresponding Z-score. If you choose a 90% service level, the Z-score will be around 1.28. Continuing to build our example, assume the product’s demand fluctuates by 10 units in either direction from the average. Then, to keep the calculation simple, we’ll choose a lead time with a clean square root — nine days.
Putting all the elements together, the example calculation would be:
- SS = Z x σD x √LT
- 1.28 x 10 = 12.8
- √9 = 3
- 12.8 x 3 = 38 units of safety stock
Max Avg Calculation Example
Consider an average daily demand of 50 and a 10-day average lead time, alongside a maximum daily demand of 65 and a 15-day maximum lead time. Using these hypothetical variables, the max avg calculation would read:
- SS = (Max Daily Demand × Max Lead Time) – (Avg Daily Demand × Avg Lead Time)
- 65 x 15 = 975
- 50 x 10 = 500
- 975 – 500 = 475 units of safety stock
Static vs. Dynamic Safety Stock (What’s the Difference?)
Static safety stock is a fixed, unchanging buffer quantity you set manually in your inventory management system. Dynamic safety stock is a more fluid alternative, using an adaptive inventory buffer that automatically adjusts in response to real-time changes in demand and lead times. Dynamic calculation outperforms static in volatile environments, since it positions you to quickly shift strategies when unexpected disruptions occur.
Common Safety Stock Mistakes To Avoid
When calculating a product’s ideal safety stock, avoid common mistakes like:
- Relying on basic, rule-of-thumb metrics that don’t provide precise answers.
- Using outdated levels that only account for historical data, not real-time shifts.
- Assuming stability in all calculations, ignoring demand or lead time variability.
Ultimately, careful calculations will help you prevent an imbalance between stockout risks and carrying costs.
Real-World Example: How Better Safety Stock Improved Performance for L’Oréal
Before incorporating GAINS into its supply chain management process, the world’s largest beauty company, L’Oréal, was manually handling inventory planning in Excel spreadsheets. The GAINS team helped L’Oréal roll out what they called “Project MEIO” (Multi-Echelon Inventory Optimization) across four global divisions in less than a year. L’Oréal was able to quickly reap the benefits of our automated, data-driven, AI-powered replenishment planning platform.
In an industry where expiration dates mark obsolescence for older inventory, more precise safety stock calculations and dynamic replenishment programs significantly reduced waste. The result was enhanced product availability for L’Oréal customers without overstocking.
Build Better Safety Stock With GAINS’s Dynamic Optimization
Using real-time data and probabilistic modeling, GAINS’s inventory management tool consistently automates, adjusts, and optimizes safety stock to ideal levels. In the GAINS platform, you’ll get a comprehensive view of your entire inventory and restocking program across global SKUs and locations. Find out how to shift safety stock strategies and respond to changes in demand or lead times with agility in our elite inventory optimization software.
