Safety stock

Safety stock is a term used by logisticians to describe a level of extra stock which is maintained to mitigate the risk of stockouts, which can be caused, for example, by shortfalls in raw material availability or uncertainty in forecasting supply and demand. Adequate safety stock levels permit business operations to proceed according to their plans. Safety stock is held when uncertainty exists in demand, supply, or manufacturing yield, and serves as an insurance against stockouts.

Safety stock is an additional quantity of an item held in the inventory to reduce the risk that the item will be out of stock. It acts as a buffer stock in case sales are greater than planned and/or the supplier is unable to deliver the additional units at the expected time.

With a new product, safety stock can be used as a strategic tool until the company can judge how accurate its forecast is after the first few years, especially when it is used with a material requirements planning (MRP) worksheet. The less accurate the forecast, the more safety stock is required to ensure a given level of service. With an MRP worksheet, a company can judge how much it must produce to meet its forecasted sales demand without relying on safety stock. However, a common strategy is to try to reduce the level of safety stock to help keep inventory costs low once the product demand becomes more predictable. That can be extremely important for companies with a smaller financial cushion or those trying to run on lean manufacturing, which is aimed towards eliminating waste throughout the production process.

The amount of safety stock that an organization chooses to keep on hand can dramatically affect its business. Too much safety stock can result in high holding costs of inventory. In addition, products that are stored for too long a time can spoil, expire, or break during the warehousing process. Too little safety stock can result in lost sales and a higher rate of customer turnover. As a result, finding the right balance between too much and too little safety stock is essential.

Safety stocks are mainly used in a "make-to-stock" manufacturing strategy, which is employed when the lead time of manufacturing is too long to satisfy the customer demand at the right cost/quality/waiting time.

The main goal of safety stocks is to absorb the variability of customer demand. Indeed, production planning is based on a forecast, which is (by definition) different from the real demand. By absorbing these variations, safety stock improves the customer-service level.

Creating a safety stock will also delay stockouts from other variations, like an upward trend in customer demand, allowing time to adjust capacity.

Safety stock is used as a buffer to protect organizations from stockouts caused by inaccurate planning or poor schedule adherence by suppliers. As such, its cost (in both material and management) is often seen as a drain on financial resources that results in reduction initiatives. In addition, time-sensitive goods such as food, drink, and other perishable items could spoil and go to waste if held as safety stock for too long. Various methods exist to reduce safety stock; these include better use of technology, increased collaboration with suppliers, and more accurate forecasting. In a lean supply environment, lead times are reduced, which can help minimize safety stock levels, thus reducing the likelihood and impact of stockouts. Due to the cost of safety stock, many organizations opt for a service level-led safety stock calculation; for example, a 95% service level could result in stockouts, but is at a level that is acceptable to the company. The lower the service level, the lower the requirement for safety stock.